Econ1102_Week_4 - Week 4 Lectures 7 & 8 Short-run Economic...

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Week 4 Lectures 7 & 8 Short-run Economic Fluctuations Reference: Bernanke, Olekalns and Frank - Chapter 6 Key Issues What is a recession? Business cycle fluctuations Output gaps and cyclical unemployment Natural rate of unemployment Okun’s law
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2 Business Cycles Economies tend to experience periods of expansion and contraction in the level of economic activity. If we focus on GDP as a measure or economic activity then: A contraction is a period during which the level of GDP falls. An expansion is a period when GDP is rising.
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3 Peaks and Troughs In moving between periods of expansion and contraction the economy will experience peaks and troughs. A peak is the beginning of a contraction, the high point of GDP prior to a downturn. A trough is the end of a contraction, the low point of economic activity prior to a recovery.
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4 Stylised Representation of a Business Cycle Level of GDP expansion contraction Peak Trough Peak Time (quarters)
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5 Quarterly Real GDP for Australia 1970-2009 0 50000 100000 150000 200000 250000 300000 Mar-70 Mar-72 Mar-74 Mar-76 Mar-78 Mar-80 Mar-82 Mar-84 Mar-86 Mar-88 Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Real GDP
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6 Early 1980s Recession in Australia 108000 110000 112000 114000 116000 118000 120000 122000 Mar-81 Jun-81 Sep-81 Dec-81 Mar-82 Jun-82 Sep-82 Dec-82 Mar-83 Jun-83 Sep-83 Dec-83 Mar-84 Real GDP Melbourne Institute dates peak (Nov 1981) and trough (May 1983), see Table 6.1
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7 Classical Business Cycle in Australia Classical cycle refers to peaks and troughs in the level of GDP Recession Dates Peak Trough No. of Months April 1951 September 1952 17 December 1955 December 1957 24 September 1960 September 1961 13 July 1974 October 1975 15 May 1976 November 1977 18 November 1981 May 1983 18 February 1990 October 1991 20
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8 Characteristics Recessions last 18 months on average Expansions last 60 months on average “Rule of Thumb” for a recession is at least two quarters of negative economic growth. This means the level of GDP has to fall for at least two quarters.
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9 Australia GDP During the GFC 240000 250000 260000 270000 280000 290000 300000 310000 Mar-05 Jul-05 Nov-05 Mar-06 Jul-06 Nov-06 Mar-07 Jul-07 Nov-07 Mar-08 Jul-08 Nov-08 Mar-09 Jul-09 Nov-09 Mar-10 Real GDP Negative growth rate Dec qtr. 2008 = -0.78 percent
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10 Potential Output Potential output ( * y ) is the level of GDP an economy can produce when using its resources (labour and capital) at normal rates. Potential output is not the same as
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This note was uploaded on 09/16/2011 for the course ACCT 1501 taught by Professor Helen during the Three '09 term at University of New South Wales.

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Econ1102_Week_4 - Week 4 Lectures 7 & 8 Short-run Economic...

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