The Business Cycle & the Rule of 70

The business cycle refers to the natural pattern of upturns (expansions, recoveries) & downturns (depressions, recessions) in the macroeconomy

The Business Cycle

11 recessions since WWII with an average length of 10 months; average expansion is 5 years, 7 months

Full business cycles range from 18 months to 10 years, 8 months

Historic U.S. Business Cycles

Two measures are used to determine recessions:◦ Unemployment◦ GDP

Macroeconomic analysis is aimed at making policy decisions that shorten recessions and lengthen expansions

Implications of Business Cycle

Employed + Unemployed = Labor force Unemployment rate is the percentage of

labor force unemployed Unemployment goes up during a recession,

down during an expansion (over the long term) – but there is ALWAYS unemployment

Relationship between aggregate output (GDP) and unemployment is inverse

Unemployment

Because prices have kept pace with (and in some areas exceeded) wage gains in last 40 years, there has been little impact on standard of living

Inflation is an increase in overall price level; deflation is its opposite

Inflation causes increased spending; deflation causes increased savings – both have negative impacts, so price stability is a goal of macroeconomics

Inflation

Long-run economic growth is accomplished gradually; GDP grows a few percent per year at most.

Rule of 70 is used to determine how many years it takes for GDP to double at its current rate of growth

Rule of 70 can only be applied to positive growth rates

Rule of 70

Where are we now?Chart of Inflation 2011-2013

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Ave

2013 1.6 2.0 1.5 1.1 1.4 1.8 2.0 1.5          

2012 2.9 2.9 2.7 2.3 1.7 1.7 1.4 1.7 2.0 2.2 1.8 1.7 2.1

2011 1.6 2.1 2.7 3.2 3.6 3.6 3.6 3.8 3.9 3.5 3.4 3.0 3.2