Jim’s Notes

Business Cycles and Short-term Stability

Business Cycle

Irregular growth of GDP

Based on changes in real GDP

Common to capitalist market economies

Technical Components of Business Cycles Using Real GDP Growth

Points:

Peak
Trough

Two phases

Expansion
‘Recovery’
a long term trend of expansion rising above previous peaks is a ‘boom’
Contraction
‘Recession’

Prolonged decline is ‘recession’

Slow growth (slower than population) sometimes called ‘growth recession’ or ‘stagnation’

‘Depression’

no formal, technical definition

very severe contraction in economy, often 10% decline or more

often very prolonged, sometimes covering a period of multiple recessions with inadequate recoveries

often results from or part of a financial ‘panic’ or financial/banking system crisis

very common in 19th and early 20th century

uncommon after Great Depression of 1930’s

Policy Goal: Cyclical Stability

Success:

Contractions (recessions) are

mild
short
infrequent

Expansions

long
stronger growth rate than population growth (increases per capita GDP)
sustainable growth rates (not too high)

Cyclical Policy Tradeoffs:

Inflation vs. Employment

Phillips curve controversies

Why Theory Matters – History and Evolution of Theories

Market Economies: Observations and History

Business cycle (18th-21th century):

Short periods of high unemployment, followed by burst of deflation

Rapid growth and war followed by inflation

Great Depression (1920-30’s)

Deflation + Unemployment

Continuous/rising inflation (post WWII)

Stagflation (1970’s)

‘Great Moderation’ 1980’s-2007

Great Recession / Little Depression 2007-present

Evolution of Macro Economic Theories

Diagram of evolution of Macro theories

ideological foundations of stable/laissez faire – stable with policy – unstable w/ policy – unstable

Inflation vs. unemployment – the apparent balancing act