LEC10 Business Cycle Fact

LEC10 Business Cycle Fact - Macroeconomic Policy Class...

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Unformatted text preview: Macroeconomic Policy Class Notes Business Cycles I: Facts Revised: November 22, 2011 Latest version available at www.fperri.net/teaching/macropolicyf11.htm So far we have focused on long run trends, i.e. in understanding why some countries like China have had a long run growth rate exceeding 5% per year for a long time while others have had a growth rate of 0% for a long time. Now we will switch gear and focus on short run fluctuations, i.e in understanding the quarter to quarter or month to month fluctuations in a given economy, like for example the 2008-09 recession in the US. These type of aggregate fluctuations are called business cycles. Defining business cycles The best definition is the one found in the book by Burns and Mitchell (1946) Mea- suring Business Cycles, Business Cycles are a type of fluctuation found in the aggregate economic ac- tivity of nations that organize their work mainly in business enterprises. A cycle consists of expansions occurring at about the same time in many economic activ- ities, followed by similarly general recessions, contractions and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recur- rent but not periodic ; in duration business cycles vary from more than one year to ten or twelve years. This definition concisely summarizes the four main features of business cycles. 1) Business Cycles are an aggregate phenomenon. That is they involve fluctuations in many economic activities hence in many economic variables, not only in GDP. Also note that fluctuations are in many economic activities but not in all activities. Therefore during a cycle some variables or activities do not follow the cycle or move in opposite directions to the cycle. 2) Business Cycles involve expansion and recessions. This is summarized by figure 1 Business Cycles 2 Figure 1: Expansions and Contractions Business Cycles 3 When economic activity is falling we are in a contraction or recession. The low point of the recession is called the trough. After the trough the economy expands till it reaches a peak. After a peak a new recession starts and so on 3) Business cycles are recurrent but not periodic. Cycles are recurrent in the sense that they happen many times but are not periodic in the sense that they do not happen at predictable times and for predictable length of time. An example of recurrent and periodic cycle is the seasonal cycle. Note that the fact that are not periodic makes them harder to predict but also more interesting to analyze in the sense that if you get them right you can take advantage of it (while there is not much advantage in getting the date of Christmas right). 4) Duration. Expansion and recession phases can have different durations (the time passing from peak to trough) and different amplitudes (the drop or increase in aggre- gate economic activity relative to the trend)....
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LEC10 Business Cycle Fact - Macroeconomic Policy Class...

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