Business Cycles and the Dynamics of GDP

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Business Cycles and the Dynamics of GDP. Chap. 27. Hong Kong Census &amp; Statistics. Two Impressions. GDP Volume is growing over time. Growth is variable. Sometimes fast, sometimes flat, sometimes negative. Decompose the series into two parts which capture each of these phenomena.

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Business Cycles and the Dynamics of GDP

Chap. 27

Two Impressions
• GDP Volume is growing over time.
• Growth is variable. Sometimes fast, sometimes flat, sometimes negative.
• Decompose the series into two parts which capture each of these phenomena.
• Potential GDP
• Output Gap
Potential GDP: Smooth growth path of GDP – constructed by statistical methods.

Business cycles are defined by the Output Gap, the percentage difference between real GDP and potential GDP.

GDP per Capita vs. Productivity
• Per Capita GDP can be broken down into two parts:

GDP

per

Capita

Productivity

GDP

per

Labor Unit

Employment Rate

Labor Unit

per

Capita

=

X

GDP per Capita vs. Productivity
• Employment can itself be broken down

Employment Rate

Labor Unit

per

Capita

Hours

per

Employee

Employed

per

Labor Force

X

=

Labor Force

per

Working Age

Population

Working Age

Population

per

Population

X

X

Productivity Catch Up: EuropeSource: Groningen Growth & Development Center

2009 Intl\$, GDP per Hour Worked (Y/L)

Productivity Catch Up: East AsiaSource: Groningen Growth & Development Center

2009 Intl\$, GDP per Hour Worked (Y/L)

Productivity Catch Up: Latin AmericaSource: Groningen Growth & Development Center

2009 Intl\$, GDP per Hour Worked (Y/L)

Unemployment Rates
• The population resides in 1 of 3 categories
• Not in the Labor Force: Not working and not actively seeking work
• Labor Force
• Employed: Currently working.
• Unemployed: Not working but seeking work.

Unemployment Rate

Level of Unemployment in HK

Hong Kong Unemployment Rates

Why is unemployment positive?

USA

• Always people losing or leaving jobs and looking for new ones.
• Always people joining the labor force.
• In natural state of labor market, people looking for jobs will match the number of people who find jobs.
Natural Rate of Unemployment
• uN = Natural Rate: Rate at which there is neither excess demand nor supply in labor market.
• Stays mostly stable over time.

http://stats.oecd.org/Index.aspx

Potential Employment and Output
• Potential employment is the level of employment when unemployment equals the natural rate.
• Potential output is GDP when employment equals potential employment
Recessions and Expansions
• The path of the economy is often divided into periods called recessions and periods caused expansions.
• No precise definition of “recession” or “expansion” exists but the period from peak of the output gap to the trough is a recession and the period when the output gap is increasing is an expansion.
• In USA, a committee at an organization called NBER “dates” periods of recessions

Level of Unemployment in HK

Rec.

Exp.

Rec.

Rec.

Exp.

Exp.

Hong Kong Unemployment Rates

Learning Outcomes

Students should be able to:

• Define the terminology of business cycles.
• Calculate unemployment rate with labor data.
• Calculate the output gap with GDP and potential GDP data.