Term Paper: Chap Review the Organization

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¶ … Chap Review

The organization that does the most important work in monitoring the U.S. business cycle -- including determining the dates for peaks and troughs -- is the National Bureau of Economic Research (NBER). Visit their business cycle page at http://www.nber.org/cycles/main.html. Here, you'll find links to a few interesting pages like "Statement of the NBER Business Cycle Dating Committee on the Determination of the Dates of Turning Points in the U.S. Economy," "U.S. Business Cycle Expansions and Contractions," and "The NBER's Business Cycle Dating Procedure: Frequently Asked Questions," along with some of the business-cycle-related press releases of the NBER. Use these items to answer the following questions.

When did the U.S. economy experience its longest recession (period of contraction)? When did it experience the longest period of expansion? When was the shortest recession? When was the shortest period of expansion? What has happened to the average length of recessions in the past 100 years? What has happened to the average length of expansions in the past 100 years?

The longest period of contraction was from October 1873 to March 1879…at 65 months. The Great Depression was only 43 months. The longest expansion lasted from March 1991 to March 2001, which clocked in at exactly 10 years (120 months).

The average length of expansions over the last 100 years has gone up a lot, especially in the last 50 years. 1919-1945 was at 35 months, which was just below what happened from happened overall from 1854 to 2009 (which was at 38.7 months) but the expansions from 1945 to 2009 clocks in at 58.4. This is surprising given that both the 1981 ish recession and the "Great Recession" both happened in that time frame but that 10-year period of growth in the 1990's certainly swayed the figures.

The average length of recessions has gone down a good deal. From 1854 to 2009, the average overall length is 17.5 but it was higher from 1854 to 1919, then dipped to 18.2 in 1919-1945 and 11.1 from 1945 to 2009…so it's definitely trending downward. It has gone from nearly two years to just under one over the years from 1854 to the present.

b. How does the NBER's definition of a recession differ from the one presented in Chapter 10? How is it similar? Why do you think the NBER dates recessions the way it does?

The NBER definition of a recession is stated as such

"A recession is a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

Source: http://www.nber.org/cycles/sept2010.html

Chapter 10 points to three main metrics on page 206…those being GDP growth, unemployment and inflation. Generally speaking, if unemployment is rising, inflation is rising and GDP is falling, then a recession is going on, as noted on page 206 and 207.

Chapter 11

The Economist often hosts online debates on issues related to politics, economics, etc. One such debate in March of 2009 centered on the usefulness of Keynesian economics, specifically in reference to the recession of 2008 and 2009. Go to the overview page of the debate at http://www.economist.com/debate/overview/140. (for more details on the rules and format of an Economist debate click on the "How an Economist debate works" link.)

a. What was the proposition being debated, and what was the result of the debate?

The motion was that, given the global recessions of the recent years (2007 to 2009 in particular), that we are all Keynesians now. The actual overall statement on the website said the following

"As economies around the world have tumbled into recession, Keynesian ideas have enjoyed a new lease of life. Conventional monetary policies seem to have reached their limits, and more and more governments have turned to looser fiscal policies. Are they right to do so -- and if they are, should they be cutting taxes or bulking up public spending? And what might Keynes have had to say about it all?"

The "house" believes that we are but the post-debate poll asking the same question was a clear 2:1 majority against that statement being true.

b. Who were the two participants in the debate, which side did each argue, and what are their credentials?

The pro-motion person was Brad DeLong. He is a professor of economics at the University of California at Berkeley and the chair of the economy major. The person going against the motion was Professor Luigi Zingales, who is a professor of Entrepreneurship and Finance at the University of Chicago's Booth School of Business.

c. Briefly summarize the opening statements of each participant

Delong offered a series of quotes and thoughts from people like Edward Prescott, Robert Barro and William Poole. He starts and ends the remarks with the thought that we are not ALL Keynesians now but that we "should be."

Zingales starts off by stating what comprises a Keynesian. He notes that the four macroeconomists that have won the Nobel in the last 37 awards given were NOT Keynesians. He finishes by taking a shot at pervasive spenders in government and notes that in private sector roles, he cites the medical field in particular, that this would get someone fired.

Chapter 10 Summary

Chapter 10 starts off by talking about the massive swings that the economy has taken during its lifespan. It notes that there was a huge stock market boom in the 1920's but it all came down with a crash in 1929 and then got a whole heck of a lot worse during the Great Depression in the 1930's. The stock market crash in 1929 resulted in nearly 13 million shares getting dumped in one day. The book then goes on to talk about assessing macroeconomic performance, with output (GDP growth), unemployment and inflation being the three primary metrics that should be looked at. If the first of those three falls or either of the two other ones rise, there should generally be cause for concern if the swing is too massive.

The GDP growth section talks about production possibilities curve and how economies, at a high level, either do or do not realize the amount of potential that they might have. There can be massive swings up or down in a short time horizon, such as what happened in 2008 when the biggest swing in 26 years occurred in the last three months of 2008. The business cycle is then described, showing peaks and troughs in economic growth with the overall trend being a rise over time. The book talks about real GDP and how it differs from other measurements of GDP. It notes that real GDP is measured by market value rather than simply looking at the volume of what is being produced, because that distinction is very important in many instances.

Figure 10.2 show that the business cycle has been fairly erratic at times during U.S. history with the period from 1929 to 1945 being very erratic. However, the graph is much smoother but is still quite jumpy through the end of the graph, which is around 2009. The book notes that the Great Depression was very seismic in nature and that other countries like Chile, France and Germany suffered quite a bit as well. World War II was a boon for the United States economy as it effectively ended the massive swings that preceded it.

The book then talks about the next metric, that being unemployment. Figure 10.3 shows that of the 300 million people in the United States, about half are in the labor force. The half that are not are either too young (under 16), retired, are in school or are homemakers. Of the 154 million workers, 14 million were unemployed in 2009. These are people that are seeking work but can't find it at the time. The book then talks about how full employment is the goal, but that this doesn't mean that everyone looking for a job will have one because that never has happened nor will it ever. Instead, there will always be at least some people unemployed due to things like new technologies making less workers necessary, seasonal employers letting go of people after their peak season and so forth. The book describes the different types of employment, those being frictional, structural, cyclical and so on. The "sweet spot" for unemployment is noted by the book to be somewhere between 4 and 6%. Anything below that will probably never happen and anything beyond that should give cause for concern.

The final point of the book's third chapter is inflation. It discussed how the purchasing power of the dollar decreases over time (except in periods of deflation, which is rare but possible) and that there is a difference between real and relative prices. For example, just because an item's price goes over time does not mean it's worth less in real terms. Massive inflationary events, like that in Germany in the 1920's, have happened before. Inflation… [END OF PREVIEW]

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