08.05.2023 Economic Fluctuations#

Chapter 13

Recessions and Unemployment#

Connection between GDP and unemplyoment

  • but not always

  • downturn GDP => higher unemployment

=> described empirically in Okuns Law

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two Definitions of Recession

NBER: period between peak and lowest point of economic activity

  • significant decline in econ. activity

  • economy-wide

alterantive: economic output level below normal level

  • possbile even during growth

  • until prevous output reached

Business Cycle#

Business Cycle: type of fluctuation (in capitalist economies) of aggregate economic activity between expansion / contraction

  • recurrent but not periodic

  • duration from one year to twelve years

Measurig aggregate Economy#

by measuirng GDP

  • Demand / Spending (households, firms, government…)

  • Production (value added)

  • Income (wages, profits…)

Flaws in GDP:

  • products not sold (care-arbeit)

  • environmental costs not included

Smooth Consumption#

People want smooth consumption

  • To have similiar quality of life

  • e.g pensions for elderly

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Smoothing via borrowing/lending/saving

Limits to shooting:

  • credit constraint

  • weakness of will

  • limited co-insurance

Volatile Investment#

Why is Investment volatile?

  • in Expansion: everybody wants to invest

    • wages rise = high demand for goods

    • firms produce more to saturate demand

    • optimistic future

  • in Contraction: nobody invests, pessimistic future

=> Vicious Cycles

Contraction

Expansion

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leads to self-enforcing business cycles

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Symmetric Moving Average#

a mathematic filter to extract cycle from trend

  • symmetric: take last values in future and past

  • moving average: calculate for every time point

Example: \(y_{t} = x_{t-1}+x_{t}+x_{t+1}\)

Government Expenditure#

  • less volative

  • because not influenced by business confidence

relatively low in Germany: aua

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Trade Deficit#

What does it mean:

  • more imports than exports

  • saving less than investing

Interpretations

  • booming economy: higher demand than local production :thumbsup:

  • foreigners invest in country :thumbsup:

  • no need for saving for higher investing :thumbsup:

  • flow abroad of divididends :thumbsdown:

Remember:

  • the money used for foreing trade

  • is reinvested in the country (I > S)

Inflation#

Inflation: Increase in the general Price level in economy

  • measured by Consumer Price Index (CPI)

  • based on representative basket

historic inflation

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GDP-Deflator: implicit measure $\( p_t^{implicit} = \frac{nominal\ GDP_t}{real \ GDP_{t-base}} \)$

  • real GDP = use prices of last year

  • nominal GDP = prices of this year