Tracking Real GDP over Time

Transcription

1 OpenStax-CNX module: m Tracking Real GDP over Time OpenStax This work is produced by OpenStax-CNX and licensed under the Creative Commons Attribution License 3.0 By the end of this section, you will be able to: Abstract Explain recessions, depressions, peaks, and troughs Evaluate the importance of tracking real GDP over time Analyze the impact of economic uctuations on a country's output and price level When news reports indicate that the economy grew 1.2% in the rst quarter, the reports are referring to the percentage change in real GDP. By convention, GDP growth is reported at an annualized rate: Whatever the calculated growth in real GDP was for the quarter, it is multiplied by four when it is reported as if the economy were growing at that rate for a full year. U.S. GDP, Figure 1: Real GDP in the United States in 2012 was about $13 trillion. After adjusting to remove the eects of ination, this represents a roughly 20-fold increase in the economy's production of goods and services since the start of the twentieth century. (Source: bea.gov) Version 1.3: Feb 6, :11 am

2 OpenStax-CNX module: m Figure 1 (U.S. GDP, ) shows the pattern of U.S. real GDP since The generally upward long-term path of GDP has been regularly interrupted by short-term declines. A signicant decline in real GDP is called a recession. An especially lengthy and deep recession is called a depression. The severe drop in GDP that occurred during the Great Depression of the 1930s is clearly visible in the gure, as is the Great Recession of Real GDP is important because it is highly correlated with other measures of economic activity, like employment and unemployment. When real GDP rises, so does employment. The most signicant human problem associated with recessions (and their larger, uglier cousins, depressions) is that a slowdown in production means that rms need to lay o or re some of the workers they have. Losing a job imposes painful nancial and personal costs on workers, and often on their extended families as well. In addition, even those who keep their jobs are likely to nd that wage raises are scanty at bestor they may even be asked to take pay cuts. Table 1: U.S. Business Cycles since 1900 lists the pattern of recessions and expansions in the U.S. economy since The highest point of the economy, before the recession begins, is called the peak; conversely, the lowest point of a recession, before a recovery begins, is called the trough. Thus, a recession lasts from peak to trough, and an economic upswing runs from trough to peak. The movement of the economy from peak to trough and trough to peak is called the business cycle. It is intriguing to notice that the three longest trough-to-peak expansions of the twentieth century have happened since The most recent recession started in December 2007 and ended formally in June This was the most severe recession since the Great Depression of the 1930's.

3 OpenStax-CNX module: m U.S. Business Cycles since 1900 Trough Peak Months of Contraction Months of Expansion December 1900 September August 1904 May June 1908 January January 1912 January December 1914 August March 1919 January July 1921 May July 1924 October November 1927 August March 1933 May June 1938 February October 1945 November October 1949 July May 1954 August April 1958 April February 1961 December November 1970 November March 1975 January July 1980 July November 1982 July March 2001 November December 2007 June Table 1: (Source: A private think tank, the National Bureau of Economic Research, is the ocial tracker of business cycles for the U.S. economy. However, the eects of a severe recession often linger on after the ocial ending date assigned by the NBER. 1 Key Concepts and Summary Over the long term, U.S. real GDP have increased dramatically. At the same time, GDP has not increased the same amount each year. The speeding up and slowing down of GDP growth represents the business cycle. When GDP declines signicantly, a recession occurs. A longer and deeper decline is a depression. Recessions begin at the peak of the business cycle and end at the trough. 2 Self-Check Questions Exercise 1 (Solution on p. 5.) Without looking at Table 1: U.S. Business Cycles since 1900, return to Figure 1 (U.S. GDP, 1900

4 OpenStax-CNX module: m ). If a recession is dened as a signicant decline in national output, can you identify any post-1960 recessions in addition to the recession of ? (This requires a judgment call.) Exercise 2 (Solution on p. 5.) According to Table 1: U.S. Business Cycles since 1900, how often have recessions occurred since the end of World War II (1945)? Exercise 3 (Solution on p. 5.) According to Table 1: U.S. Business Cycles since 1900, how long has the average recession lasted since the end of World War II? Exercise 4 (Solution on p. 5.) According to Table 1: U.S. Business Cycles since 1900, how long has the average expansion lasted since the end of World War II? 3 Review Question Exercise 5 What are the typical patterns of GDP for a high-income economy like the United States in the long run and the short run? 4 Critical Thinking Questions Exercise 6 Why do you suppose that U.S. GDP is so much higher today than 50 or 100 years ago? Exercise 7 Why do you think that GDP does not grow at a steady rate, but rather speeds up and slows down? 5 References The National Bureau of Economic Research. Information on Recessions and Recoveries, the NBER Business Cycle Dating Committee, and related topics.

5 OpenStax-CNX module: m Solutions to Exercises in this Module Solution to Exercise (p. 3) Two other major recessions are visible in the gure as slight dips: those of , and Two other recessions appear in the gure as a attening of the path of real GDP. These were in and recessions in approximately 70 years averages about one recession every six years. The table lists the Months of Contraction for each recession. Averaging these gures for the post-wwii recessions gives an average duration of 11 months, or slightly less than a year. The table lists the Months of Expansion. Averaging these gures for the post-wwii expansions gives an average expansion of 60.5 months, or more than ve years. Glossary Denition 1: business cycle the relatively short-term movement of the economy in and out of recession Denition 2: depression an especially lengthy and deep decline in output Denition 3: peak during the business cycle, the highest point of output before a recession begins Denition 4: recession a signicant decline in national output Denition 5: trough during the business cycle, the lowest point of output in a recession, before a recovery begins