Week 8

Economic Fluctuations and unemployment

Another important indicator: Real economy, unemployment

Business cycle and umployment in macro economy

Famous measure: GDP

What exactly is GDP? To begin to know each component of GDP

C+I+G+NX

Going to formulate half of the economic aggregate demand,

When we talk labour we talk ab out aggregate supply

Aggregate demand.

What exactly is GDP? We need to first talk about business cycle

Business cycle: alternating period of positive growth and negative growth rates in relation to GDP

In general most economic experience this cycle.

Commonly used term: recessision: negative growth, generally speaking. A period is declining, is
negative growth is actually shrinking.

Can we compre the recession?

Most people, sensitive to thing affect. Unemployment: increase if there is recession. Through labour
market outcomes.

GDP is measure output. If output is declining, input is declining is come down. People employed
down, and unemployment increase.

What can actually we said.

Motivated this, highlight.

UK GDP growth in the top growth and the unemployment in bottom graph. There is law ocken law. If
unemployment goes up, Growth is come down. This is basically, quietly real.

GDP, Unemployment, what is GDP

GDP: measure of aggregate economic or ouptu, what economy can produce. The ouput of all
producers, in country.

National AccountsL find it in ABS. Different central bank different location

HOW WE MEASURE OUTPUT GDP?

1. Total spending on domestic products : final goods in the economic, actual value of the
output. The expenditure method. Total speding of finfal goods.
2. Total domestic production (Measured as value added) : process that used to manufactured
that. Decompose it into to return to the firms and labour. It could be a simply of domestic
income. Output into the the input: labour, capital and it could be combined together into
final output. Value added from the all input to measure input.
Example, manufacture watch, material, process, into output). We get rubber, molden,
labour capital, fit to margin, to retail, marketing, ambassador, overhead, value added
process. Raw material, get into something, transform to final goods. Pay to the watch,
reflective, actual production process. It is reflecting of value added of its process.
In some ways, that is also giving money to the firm, income to firm, and it produce thing
again too. Added them up, theoreotically, you should get exactly the same number. The
three is connected.
3. Total domestic income.

Measuring the aggregate economy.

Buy TACO: 20 Pesos.

Reflect production process: chicken, crusty shells, mayonnaise. All the raws ingredients put it into
together.

20 pesos also represents, income of the vendor itself. The only difference is, how many stages do
you need. Return in labour relatives to firm itself.

Consulting: the value added the report.

Production: ingenuity. You still can see the circular flow.

One thing we neglected, Net Exports, how we deal with international exports ande imports.

EXPORTS AND IMPORTS.

IMPORTS, we definitely consume imports. It goes to overseas, because the production is in overseas.

EXPORTS, it should be included, because it produce locally. Two things we have to care.

Government: funny beast. It simply another producer. Produce of public services.

Where the revenue comes from, it from taxes.

Government measure of production, it also captures value added form public services (from tax)

Needs to employs inputs: labour, computers, public servant, building. Expenditure part.

Income is earned through wages, rent and profit. (return on capital)

Public goods, we assume it perfectly competitive market.

Compnent GDP – Expenditure Method

GDP = C + I + G + X – M
Also known as Y or aggregate demand.

Investment always have inventory, buying inputs, produce stuff, you have inventory when it not sell
all of them.

You have positive inventory, Produce additional units, when up by 5 units, therefore, you have to
increase the production.

If you have down inventory, you did not produce enough units. Double counting. When actually,
goes down, it already countetd previous year.

That’s why we talk about investment, inventory, you have to make sure count correctly.

Consumption is very important component.

For most developed country, Investmenet is very important.

US and Eurozone. Government spending. As we know, maximize component in Europe.

Government expenditure. Production of goods and services. What is not included. Things such
transger and benefits. (pensions, unemployment benefits).

Those thing is not included. Transfer the pension government. Reflected in consumption it self.

From this, we can think about component of GDP growth.

UNITED STATES, during this times, makes up about 70% of US GDP the effect of investment on GDP
was more than three times larger.

Investment has a large drop, this is not simply restricted to global financial crises. India and England,
left hand sight. Aggriculture, is very2 volitile compared to GDP. Consisted to global financial crisis.

Why this happened?

In short, we talk about coordination.

What is actually drive this fluctuations

Composed GDP: affect component affect all the aggreaget.

Consumption lets talk about it, because it highest part in company.

Everyhousehold face a shock, unexpected events to make GDP fluctuates.

Why?

Good or bad fortunes strikes the household

Good or bad fortune strikes the entire economy.

Positive shock: commodities boom. Effective shocks to the economy.

Random events

Lets talk about household.

Households, generally speaking

Purchase insurance.

1. Self insurance: diligent agent during good times and bad times draw money to poor.
Typical example is protection insurance.
2. Co-insurance Support from social network and government, for example unemployment
benefits, or disability pensions. Come from the government, excessible to everyone. Is
basically to converment.

When time sis bad we want to consume things, kind of reflection of consumption
smoothing, co insurance.. They are to a degree some altrusitci.

Economy wides shocks

Government uneumployment benefits:

IF bad shocks actually happened, everyone get affected. Everyone gonna pool all fund. It is ability for
government to pay out becoming questionable. During this time people need co-insurance the most.
Put it this way. Government what is going happen.

Tax revenue during recession, comes down. What about ability to pay, going down too.

Farming community. If everyone hit by drough. Drowin out of pool, that gonna be questionable to
pay out. Government can produce money, but the investor affect to not trust the money.

Co-insurance, is least ineffective, if it is hit as a global.

What they do offer, community based type insrace. Altruism. CO-insurance has being replaced.

Consumption smoothing what is affect all of this.

If we thinka bout decision to consume, income typical lifespend. What actually happened. Income at
first you not ganno pay much, when you promote higher, and eventually low.

Borrow money to maintain the consumption.

Smooth up the consumption.

What all of this mean?

Source of stabilization, previous diagram, you have to borrow, an institutiron borrow, safe, and trust
the bank. It gonna have problem if there is no trust. If there is a shock you follow the shock, you
withdraw and no all borrow.
Consume today, not care about the future. Co-insurance. Following the consumption, has basically
being reduce.

Credit constraints.

Household can borrow. Increase in income. They will make consumption forward, they will start
borrowing money to increase conumsptione. They mainted the same level consumption.

Very simple to explain. Increase in income. You going to shift up indifference curve, consumption is
going to increase as well as the future.

Differ: if you cannot borrow or save. Low consumptions

Weakness of will

We don’t trust the future.

What happened: income is going to drop. You are going to probably began saving the money. Drop
your consumption, so that actually have same level of saving. When you hit the consumption. You
have to follow the income path. Credit constraint or weakness of will. Less volitaile.

How about investment

Why investment more volatile.

The firm, it doesnot care about much smoothing or not. It is objective to gain profit.

Consumize is objective.

If is high enough people, they will buy more, to increase profit, and need another people to increase.

Volatile investment is like game theory.

Poor capacity utilization, why you want to invest.

Poor demand, why you invest into the plant.

If both and firm invest. Supposed they make up a lot of part economy. People going to be richer.
People increase in income. They will buy goods. They will buy goods. Improve capacity utilization,
you created a cycle.

You need a have coordinate. They must be a prediction demand for firm. This is why, expectation
and confidents matters a lot. We expect people buy the products.

Everyone will going to consume. This particular graph is quiet compelling.

Indication very much .

When they should invest. If it is good economic will take off.

Once people feel good about things, they make investments make circles self-reinforcing
Government spending is less volatile than investment (does not depend on business confidence)

Exports depend on demand from other countries so will fluctuates according to the business cycles
of major experts.

Inflation.

Basically is price level, increase price level, during recession ( price goes down)

During boom: price tend to go up.

Trend in inflation, happen to economic crisis.

1975 inflation oil prices

1990 bond crisi

1995 Galf war

1999 asian financial crisis

2008 global financial cris.

Inflation spikes high in poor than in rich countries

To measure infaltions

CPI: measure cost of living.

When we want to talk about GDP

GDP, REAL GDP and NOMINAL GDP.

GDP deflator. A measure of the level of prices for domestically produced output.