Chapter 31 The business cycle

1
Chapter 31The business cycle

• David Begg, Stanley Fischer and Rudiger
  Dornbusch, Economics,
• 6th Edition, McGraw-Hill, 2000
• Power Point presentation by Peter Smith

2
The business cycleshort-term fluctuations of
total output around its trend path
Output
Time
3
UK growth of real GDP
Source Economic Trends Annual Supplement
4
The political business cycle

• Some commentators have suggested that there is a
  political business cycle
• whereby governments adopt tight monetary and
  fiscal policy soon after an election
• but then adopt more expansionary policies as the
  election approaches to encourage a feel-good
  factor

5
Theories of the business cycle

• The multiplier-accelerator theory
• the multiplier communicates the effects of
  changing investment to aggregate demand
• the accelerator assumes that firms gauge future
  demand by reference to past output growth
• this model can produce fluctuations in output
  level in response to a shock

6
Fluctuations in stock-building

• Stockbuilding may also be a cause of fluctuations
  in output
• Firms tend to use stocks to smooth production in
  the face of fluctuating demand
• Output per worker tends to rise in times of boom,
  and fall in times of recession.

7
Real business cycles

• In this view of the world, fluctuations in actual
  output are fluctuations in potential output
• so there is no point in trying to stabilize
  output over the business cycle.
• Although some swings in potential output do
  occur, many short-run fluctuations are more
  likely to reflect Keynesian departures from
  potential output.

8
Is there an international business cycle?Growth
in GDP, selected countries
Source International Financial Statistics