SV151, Principles of Economics
K. Christ
23 – 27 January 2012
A Stylized View of the Macroeconomic Cycle
Aggregate Output
Positive Output Gaps:
Actual output exceeds trend
or “potential” output;
potential exists for falling
unemployment and upward
pressure on prices.
Negative Output Gaps:
Actual output falls below trend
or “potential” output;
potential exists for rising
unemployment and downward
pressure on prices.
Time
Gapology
The output gap measures how far the
economy is from its full employment or
"potential" level that depends on supplyside factors of the economy: the supply of
workers and their productivity. During a
boom, economic activity may for a time rise
above this potential level and the output
gap is positive. During a recession, the
economy drops below its potential level and
the output gap is negative. In theory, the
output gap can play a central role in
monetary policy deliberations and strategy.
First, one of the goals of the Federal Reserve
is to maintain full employment, which
corresponds to an output gap of zero.
Second, the output gap is a key determinant
of inflation. A positive output gap implies an
overheating economy and upward pressure
on inflation. A negative output gap implies a
slack economy and downward pressure on
inflation. But, there is a catch: we can't
directly measure potential output or the
output gap. Instead, economists estimate
them using statistical and economic models.
Sources: “How Big Is the Output Gap?” Federal Reserve Bank of San Francisco Economic Letter 2009-19; June 12,
2009, http://www.frbsf.org/publications/economics/letter/2009/el2009-19.html , and Congressional Budget Office,
http://www.econbrowser.com/archives/2009/01/cbos_projected.html
Quarterly GDP Growth and Business Cycle Information for U.S. Economy, 1960 to present
20%
Growth Rates:
Average
GDP
3.20%
Percapita GDP 2.16%
Population
1.02%
15%
Std. Dev.
3.60%
3.53%
0.19%
10%
5%
3.2%
0%
-5%
4/60 – 2/61
12/69 – 11/70
1/80 – 7/80
7/81 – 11/82
11/73 – 3/75
7/90 – 3/91
3/01 – 11/01
12/07 – 8/09
Data Source: Bureau of Economic Analysis
2008-I
2006-I
2004-I
2002-I
2000-I
1998-I
1996-I
1994-I
1992-I
1990-I
1988-I
1986-I
1984-I
1982-I
1980-I
1978-I
1976-I
1974-I
1972-I
1970-I
1968-I
1966-I
1964-I
1962-I
1960-I
-10%
0
-10
Consumption
Investment
-20
-30
-40
-50
-60
Government
2009-III
2009-II
2009-I
2008-IV
2008-III
2008-II
2008-I
2007-IV
2007-III
2007-II
2007-I
2006-IV
2006-III
2006-II
2006-I
2005-IV
2005-III
2005-II
2005-I
2004-IV
2004-III
2004-II
2004-I
2003-IV
2003-III
2003-II
2003-I
2002-IV
2002-III
2002-II
2002-I
2001-IV
2001-III
2001-II
2001-I
2000-IV
2000-III
2000-II
2000-I
% Change
Cyclical Behavior of GDP Components
40
30
20
10
Data Source: Bureau of Labor Statistics, CPI-U
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
Jan-90
Jan-88
Jan-86
Jan-84
Jan-82
Jan-80
Jan-78
Jan-76
Jan-74
Jan-72
Jan-70
Jan-68
Jan-66
Jan-64
Jan-62
Jan-60
Monthly Inflation Rate for U.S. Economy, 1960 to present
16%
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
Measuring Inflation: Various Price Indexes
Index
Consumer Price Index (CPI)
Billion Price Index (BPI)
Producer Price Index (PPI)
Implicit Price Deflator (IPD)
Source
BLS
MIT
BLS
BEA
Focus
Consumer prices
Mostly consumer prices
Producer prices (commodities, raw materials, etc.
All prices (broadest measure)
Source: Billion Price Project @ MIT, http://bpp.mit.edu/usa/
Data on U.S. Prices – Consumer Price Index
CPI Categories, Weights, and Percentage Changes
December 2011
CPI Inflation (annual rate)
Category
Food and beverage
Housing
Apparel
Transportation
Medical Care
Recreation
Education and Communication
Other
3.0
Weight
14.972
41.46
3.601
17.308
6.627
6.293
6.421
3.497
% Change
4.5
1.9
4.6
5.2
3.5
1.0
1.7
1.7
Source: Gavyn Davies, “Commodity shock is a nightmare for central bankers.” 4 February 2011,
http://blogs.ft.com/gavyndavies/2011/02/04/commodity-shock-is-a-nightmare-for-central-bankers/
Data Source: Bureau of Labor Statistics, Monthly Unemployment Rate
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
Jan-90
Jan-88
Jan-86
Jan-84
Jan-82
Jan-80
Jan-78
Jan-76
Jan-74
Jan-72
Jan-70
Jan-68
Jan-66
Jan-64
Jan-62
Jan-60
Monthly Unemployment Rate for U.S. Economy, 1960 to present
12%
10%
8%
6%
4%
2%
0%
Employment Statistics
MONTH
POP
CNIP
Jan-08
303,506
232,616
154,048
146,421
7,628
5.0%
66.2%
62.9%
Feb-08
303,711
232,809
153,600
146,165
7,435
4.8%
66.0%
62.8%
Mar-08
303,907
232,995
153,966
146,173
7,793
5.1%
66.1%
62.7%
Apr-08
304,117
233,198
153,936
146,306
7,631
5.0%
66.0%
62.7%
May-08
304,323
233,405
154,420
146,023
8,397
5.4%
66.2%
62.6%
Jun-08
304,556
233,627
154,327
145,768
8,560
5.5%
66.1%
62.4%
Jul-08
304,798
233,864
154,410
145,515
8,895
5.8%
66.0%
62.2%
Aug-08
305,045
234,107
154,696
145,187
9,509
6.1%
66.1%
62.0%
Sep-08
305,309
234,360
154,590
145,021
9,569
6.2%
66.0%
61.9%
Oct-08
305,554
234,612
154,849
144,677
10,172
6.6%
66.0%
61.7%
Nov-08
305,786
234,828
154,524
143,907
10,617
6.9%
65.8%
61.3%
Dec-08
306,004
235,035
154,587
143,188
11,400
7.4%
65.8%
60.9%
Jan-09
306,208
234,739
154,140
142,221
11,919
7.7%
65.7%
60.6%
234,913
154,401
7,631
154,164
=235,086
= 0.049
153,936
235,271
154,718
141,687
12,714
8.2%
65.7%
60.3%
140,854
13,310
8.6%
65.6%
59.9%
140,902
13,816
8.9%
65.8%
59.9%
140,438
14,518
9.4%
65.8%
59.6%
9.5%
65.7%
59.4%
9.4%
65.4%
59.3%
9.7%
65.4%
59.1%
9.8%
65.1%
58.7%
306,402
Feb-09
Unemployment
UNEMP
306,588
Mar-09
=
Rate
CLF
306,787
Apr-09
CLF
EMP
UNEMP
May-09
306,984
235,452
Jun-09
307,206
Jul-09
307,439
Aug-09
307,685
235,655
154,759
235,870Labor Force
154,351=
Participation Rate
236,087
154,426
Sep-09
307,946
236,322
153,927
138,768
Oct-09
308,189
236,550
153,854
Nov-09
308,418
236,743
153,720
138,242
15,612
Employment
=
138,381 Rate 15,340
Dec-09
308,633
236,924
153,059
137,792
154,956
http://www.bls.gov and http://research.stlouisfed.org/fred2/
URATE
140,038
14,721
CLF139,817 153,936
14,534
=
= 0.660
CNIP
233,198
139,433
14,993
15,159
15,267
EMP
CNIP
LFPR
EMRATE
10.1%146,30665.0%
58.4%
=
= 0.627
10.0%233,19864.9%
58.5%
10.0%
64.6%
58.2%
Historical U.S. Employment Statistics
Employment-Population Ratio (Employment Rate)
66.0
64.0
62.0
60.0
58.0
56.0
54.0
52.0
Jan-00
Jan-05
Jan-10
Jan-05
Jan-10
Jan-95
Jan-90
Jan-85
Jan-80
Jan-75
Jan-70
Jan-65
Jan-60
Jan-00
Unemployment Rate
12.0
Jan-55
Jan-50
50.0
Labor Force Participation Rate
68.0
66.0
10.0
Cyclical
Unemployment
8.0
64.0
62.0
60.0
6.0
58.0
4.0
56.0
Frictional and
Structural
Unemployment
54.0
Jan-95
Jan-90
Jan-85
Jan-80
Jan-75
Jan-70
Jan-65
Jan-60
Jan-10
Jan-05
Jan-00
Jan-95
Jan-90
Jan-85
Jan-80
Jan-75
Jan-70
Jan-65
Jan-60
Jan-55
Jan-50
Jan-55
52.0
0.0
Jan-50
2.0
Comparing Post-War Recessions and Recoveries
Percent Job Losses During Recession and Recovery
Percent Job Losses
Relative to Peak Employment Month
1948
1982
1990
Number of Months After Peak Employment
Source: http://www.calculatedriskblog.com
2001
Output, Prices, and Unemployment during the Great Depression
Counterpoints of 2oth c. macroeconomic thought
John Maynard Keynes
1883 – 1946
The General Theory (1936)
Friedrich Hayek
1899 – 1992
The Road to Serfdom (1944)