An Overview of Business Cycle Theories Dr. Dennis Foster peak trough recovery contraction.
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Transcript of An Overview of Business Cycle Theories Dr. Dennis Foster peak trough recovery contraction.
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An Overview ofAn Overview ofBusiness Cycle TheoriesBusiness Cycle Theories
Dr. Dennis Foster
peak
trough
recoverycontraction
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Characteristics & Features
• Rise and fall in Gross Domestic Product Gross Domestic Product (GDP) around some long term trend.
• UnemploymentUnemployment generally lags ∆GDP
• InflationInflation generally inversely relatedand lags during the expansion.
• Four phases:peak, contraction, trough, recoverypeak, contraction, trough, recovery
• Contraction aka “recessionrecession” or “downturn” or “depression” [old days – “panic”]
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• Identifies dates of business cycles (here).
• Dec. 2007 peak called in Dec. of 2008 (here).
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.
• June 2009 trough called in Sept. 2010 (here).
The recession lasted 18 months, which makes it the longest of any recession since World War II.
National Bureau of Economic Research
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The Data on U.S. Business Cycles
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Problematic Problematic RecoveryRecovery
2001
2008
Ave. = 2.8%Ave. = 2.25%
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Thomas MalthusThomas Malthus
• Workers paid less than the value of their production.
• Excess supply develops acrossthe economy.
• Firms/owners reduce employment to liquidate these inventories.
• Depression.
• FYI – long run wages at subsistence.[Economics as the “dismal sciencedismal science.”]
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Joseph SchumpeterJoseph Schumpeter• Business cycles form patterns.
• Inventory adjustments – 3 to 5 yrs.
• Fixed investment – 7 to 11 yrs.This is what we call thethe business cycle.
• Infrastructure building – 15 to 25 yrs.
• Major innovations – 45 to 60 yrs.
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Karl MarxKarl Marx• Capitalism produces surplus value.
• Production goes unsold.
• Crisis ensues; depression.
• Worsens over time!!
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Lord John Maynard KeynesLord John Maynard Keynes
• Lack of confidence reduces spending.
• Normal channel of saving to investment breaks down.
• Wages (and prices) don’t fall.
• Result – depression.
• SolutionSolution – replace privatespending with public spending.
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Milton FriedmanMilton Friedman• Emphasizes the role of money.
• Depressions preceded by fall in MS.
• Government controls money supply.
• Government is the source of failure.
• In a depression, raise MS to counter.
• Ben Bernanke as follower.
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Ludwig von MisesLudwig von Mises
• The Austrian School – Hayek, too.
• Embrace Say’s Law.
• Depressions due to “credit bubbles.”
• Bubbles perpetuated by the Fed.
• Depression allows reallocation.
• “Solution” – leave it alone.
• Worst case – try to undo it.
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Say’s LawSay’s Law
• Casually – supply creates demand.
• Our total purchasing power (spending) comes from our sales (income).
• Excess supply is impossible in every sector of the economy.
• Sectors with excess demand willattract more resources.
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An Overview ofAn Overview ofBusiness Cycle TheoriesBusiness Cycle Theories
Dr. Dennis Foster
peak
trough
recoverycontraction