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Chapter 13 (1) - Economic fluctuation and unemployment - Coggle Diagram
Chapter 13 (1) - Economic fluctuation and unemployment
Unit 1
But growth has not been smooth. Figure 2 shows the case of the British economy, for which data over a long period is available.
2
Economies in which the capitalist revolution has taken place have grown over the long run
The first chart shows GDP per person (per capita) of the population from 1875. This is part of the hockey stick graph
A natural disaster like Hurricane Katrina in the US state of Louisiana in 2005 could have triggered an increase in both stress and unemployment.
The chart next to it shows the same data but plots the natural logarithm (‘log’) of GDP per capita. This is a way of presenting the ratio scale
Maybe we have it the wrong way round, and actually Google searches cause unemployment. Economists call this reverse causality
Transforming the data into natural logs in the right-hand panel allows us to answer the question about the pace of growth more easily.
When a line of best fit is upward sloping, it means that higher values of the variable on the horizontal axis (in this case the rise in unemployment) are associated with higher values of the variable on the vertical axis (in this case, the increase in Google searches for antistress medication).
For a graph in which the vertical axis represents the log of GDP per capita, the slope of the line (the dashed black line) represents the average annual growth rate of the series.
The upward-sloping line is called a line of best fit or a linear regression line
3
We see that states that had a larger increase in the unemployment rate between 2007 and 2010, also had a larger increase in searches for antistress medication. This suggests that higher unemployment is related to higher stress. We say the two are correlated.
The top panel of Figure 3 plots the annual growth rate of UK GDP between 1875 and 2014.
Following the global financial crisis in 2008, unemployment went up, as did the number of searches for antistress medication on Google.
So we have two definitions of recession:
NBER definition: output is declining. A recession is over once the economy begins to grow again.
Alternative definition: the level of output is below its normal level, even if the economy is growing. A recession is not over until output has grown enough to get back to normal.
1
The movement from boom, to recession, and back to boom is known as the business cycle
Economists measure the size of the economy using the national accounts: these measure economic fluctuations and growth.
In the lower part of Figure 3 you can see that the unemployment rate varies over the business cycle. During the Great Depression, unemployment in the UK was higher than it had ever been, and it was particularly low during the World Wars.
Fluctuations in the total output of a nation (GDP) affect unemployment
Unit 2
In each country chart, there is a downward-sloping line that best fits the points.
In the US, for example, the slope of the line implies that, on average, a 1% increase in the output growth rate decreases the unemployment rate by roughly 0.38 percentage points. We say that Okun’s coefficient is –0.38 in the US.
When a country’s output growth was high, unemployment tended to decrease.
We can summarize the relationship between output, unemployment, and wellbeing like this:
A fall in output growth => A rise in the unemployment rate => A fall in wellbeing
Figure 4 shows the relationship between output and unemployment fluctuations, known as Okun’s law.
Okun's Law is defined as:
Δ𝑢𝑡=𝛼+𝛽(GDP growth𝑡)
4
Δut is the change in unemployment rate at time t, (GDP growtht) is the real GDP growth at time t, α is the intercept value, and β is a coefficient determining how real GDP growth is predicted to be translated into a change in unemployment rate.
Unit 3
Figure 5 shows the circular flow between households and firms (ignoring the role of government and purchases from and sales abroad for now).
It is always the case that one person’s expenditure is another person’s income, globalization means that often the two people are in different countries. This is the case with imports and exports
5
GDP is defined to include exports and exclude imports:
as the value added of domestic production, or as expenditure on domestic production
as income due to domestic production
There are three different ways to estimate GDP:
Spending
Production
Income
The government can be seen as another producer, like a firm—with the difference that the taxes paid by a particular household pay for public services in general, and do not necessarily correspond to the services received by that household.
The national accounts are statistics published by national statistical offices that use information about individual behaviour to construct a quantitative picture of the economy as a whole.
Since public services are not sold in the market, we also have to make a further assumption: that the value added of government production is equal to the amount it costs the government to produce.
Economists use what are called aggregate statistics to describe the economy as a whole
Unit 4
This represents the consumption and investment purchases by the government (consisting of central and local government, often called ‘general government’).
Government investment spending is on the building of roads, schools, and defence equipment. Much of government spending on goods and services is for health and education.
Investment in the unsold output that firms produce is the other part of investment that is recorded as a separate item in the national accounts. It is called the change in inventories or stocks.
Net exports, also called the trade balance, this is the difference between the values of exports and imports (X – M).
This is the spending by firms on new equipment and new commercial buildings; and spending on residential structures
The trade balance is a deficit if the value of exports minus the value of imports is negative; it is called a trade surplus if it is positive.
From the table in Figure 6 we see that in the advanced countries, consumption is by far the largest component of GDP
To calculate GDP, which is the aggregate demand for what is produced in the country, we add the purchases by those in other countries (exports) and subtract the purchases by home residents of goods and services produced abroad (imports).
Services are things that households buy that are normally intangible, such as transportation
In most countries, private consumption spending makes up the largest share of GDP. Investment spending accounts for a much smaller share
Goods that last for three years or more are called durable goods; those that last for shorter periods are non-durable goods.
The equation below shows how GDP growth can be broken down into the contributions made by each component of expenditure. We can see that the contribution of each component to GDP growth depends on both the share of GDP that the component makes up and its growth over the previous period.
percentage change in GDP =(percentage change in consumption ×share of consumption in GDP)+(percentage change in investment ×share of investment in GDP)+(percentage change in government spending ×share of government spending in GDP)+(percentage change in net exports ×share of net exports in GDP)
Consumption includes the goods and services purchased by households. Goods are normally tangible things.
7
Figure 6 shows the different components of GDP from the expenditure side, as measured in the national accounts for economies on three different continents: the US, the Eurozone, and China.
The table in Figure 7 shows the contributions of the components of expenditure to US GDP growth.
6
The data is for 2009, in the middle of the recession caused by the global financial crisis. We can see that:
Although investment makes up less than one-fifth of US GDP, it was much more important in accounting for the contraction in the economy than the fall in consumption spending.
Although consumption makes up about 70% of US GDP, the effect of investment on GDP was more than three times larger.
In contrast to consumption and investment, government expenditure contributed positively to GDP growth. The US government used fiscal stimulus to prop up the economy whilst private sector demand was depressed.
Net exports also contributed positively to GDP, which reflects both the stronger performance of emerging economies in the aftermath of the crisis and the collapse in import demand that accompanied the recession.
Three things need to be kept in mind when using the concept of GDP:
It is a conventional measure of the size of an economy
Distinguish aggregate GDP from GDP per capita
GDP per capita is a flawed measure of living standards