¡Descarga Business Cycles and Unemployment: Measuring the Aggregate Economy y más Resúmenes en PDF de Introducción a la Economía solo en Docsity! + X The business cycle “Business eyale- alternating periods of positive and negative growth rates (successions of peaks and troughs) Recessions a period when output is declining or below its potential level The business cycle affects labour market outcomes Economic growth is not a smooth process Okun's Law= a strong and stable relationship between the unemployment rate and GDP growth Obon's coeficient = Degiee Y Correlatoo Changes in the rate of GDP growth are negatively correlated with the unemployment rate eN 1 Output falls and consequentiy unemployment rises and well-being falls Output y uremplozment 4 well being do | mar cor roma “Measuring the aggregate economy "The circular flow model: spending, production and income Nationalaccounts- system used to measure overall output and expenditure in a country 3 equivalent ways to measure GDP: 1. Total spending on domestic products 2. Total domestic production (measured as value added) 3. Total domestic income "Value added in the production process is the “Capital goods and labour used in production are inputs but are not intermediate goods. "The value added 15 equal to profits before taxes plus wages Intermediate goods are counted as value added in the industries where they. “Measuring GDP as value added prevents double-counting Economic fiuctuations and investment Volatile investment Firms don't have preferences for smoothing like households They adjust investment plans to both temporary and permanent shocks, to maximise their profits High demand> high capacity utilisation> investment -> even higher demand Investment decisions depend on firms' expectations about future demand rr” lo no capact th taa slot ad. tati ed ps han muje Xx 2 O a ES 7 Investment: a coordination game «Actorsithe two firms + “Actions: invest, or do not invest 1 e “Information: they decide simultaneously E “Payotf:profits from investment E ¿| 80 ¿y mot puseto ejjrcert: - Investment is the best response to obher firms' investment (coordination game) 4hey covlA. improve. uo ash, equtibriyon y they both acest: Both firms have to coordinate (agree to invest). If they are optimistic about the future (have business confidence), tt will be good for them and for the whole economy. Relation betueen bostaess confidence, demand and muestment 1 2 Growth rate (%) — Growth! demand(€ + 6 + X-M (eli) — Groso investment) et xi) e — insti onfidence indicator (aha) Industrial confidence Indicator (annual average) LEE 83 É "TU TM E5E5R88888888 88888 Investment and the agregate economy. The benefits of coordinating investments makes cycles self: reinforcing Firms respond positively to the growth of demand in the economy. This is why investment 15 more volatile than GDP “ - EA uctaaticas. (more coat) | bus cono a payo Mortkasy- polecy, Philips core : relatrarshop between unemplogment and coflacton Other components of GDP. - Government spending: less volatile than investment (does not depend on business confidence) -Exports depend on demand from other countries, so will fuctuate according to the business eyole of major export markets Inflation ls an increase in the general price level in the economy. Inflation tends to be lower during the recessions (high unemployment, less demand) "Trends in inflation -upward spikes in inflation during economic crises -general downward trend since 19705 ainflation tends to be higher in poor than in rich countries Measuring: "The consumer price index (CPI) measures the general level of prices that consumers have to pay for goods and services, including consumption taxes -based on a representative bundle of consumer goods -“cost of living” -common measure of inflation = change in CPI GDP deflator: measure of the level of prices for domestically produced output (ratio of nominal to real GDP) tracks prices of components of GDP -allows GDP to be compared across countries and over time
