Lecture 2 Flashcards
Give a description of different aspects of a business cycle.
In the long term, GDP tend to follow a trend path (grow). In the short to medium term, GDP tend to fluctuate around the long term trend. This cyclical movement of GDP is labelled the business cycle.
Draw and explain the business cycle’s different phases.
Where are we today in the business cycle?
In an upswing. At the stage we are at now (probably like point E), profits grow significantly faster than output. When profits outpace output companies report strong earnings - which is reflected in strong increases in the stock market.
Explain the financial crisis with the business cycle.
If the good times last for many years (point C/D), firms tend to become too optimistic. Then they invest too much and consumers spend too much and savings get really low. This leads to asset price inflations: including stocks and real estate.
What is the definition of a recesssion?
Two successive quarters with negative real GDP growth.
How long does a typical business cycle last?
Typical cycles lasts roughly 5 years from peak to peak or bottom to bottom, but are not perfectly regular.
What is the sum of all current accounts in the world?
The sum of all current accounts in the world is zero (assuming there is no statistical errors, which there is).
Explain current acount surplus and deficit.
Current account surplus means that exports exceeds imports. Current account deficit means that imports exceeds exports. If there was only two countries in the world and one of them had a current account surplus, the other must be in a deficit.
What is a political business cycle?
A political business cycle arises from government manipulation of the economy to make things look good just before election.
Characteristics of a recovery (upswing) in a business cycle.
Output starts to grow -> Profits grow faster than output -> Firms increase capital spending and start to hire workers -> If the good times last for too long, the firms tend to become too optimistic -> Consumers spend too much and save too little -> Inflation including increasing wage demands -> Asset price inflation driven by high appetite for risk -> Interest rates climb up -> The economy is set for a new recession.
Characteristics of a recession in a business cycle.
Firms cut capital spending sharply -> Productivity growth declines -> Profits falls -> Firms starts to layoff workers -> If the recession is long, firms and consumers may turn too pessimistics which creates opportunities for others.
What is happening to the business cycles around the world?
They seem to get more synchronized around the world (reflecting increased globalization/integration of markets).
How is GDP defined?
Y=C+I+G+X-M. To forecast GDP you need to forecast all 5 components.
What is Y=C+I+G+X-M?
The formula for GDP = Consumption + Investments + Government spending + Export - Import.
