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 …