Macroeconomics: The Big Picture
Read this chapter and attempt the "Try It" exercises. Also, complete the concept problems and the numerical problems at the end of the chapter. In the first section of this chapter, you will read about the definition of Gross Domestic Product and some of the issues around measuring it. You will also learn about the 4 phases of the business cycle. As you will see, the economy goes through naturally alternating periods of economic growth and recession. You will review certain sections of this chapter later in the unit.
1. Growth of Real GDP and Business Cycles
Business Cycles and the Growth of Real GDP in the United States
Figure 5.2 "Expansions and Recessions, 1960–2011" shows movements in real GDP in the United States from 1960 to 2011. Over those years, the economy experienced eight recessions, shown by the shaded areas in the chart. Although periods of expansion have been more prolonged than periods of recession, we see the cycle of economic activity that characterizes economic life.
Figure 5.2 Expansions and Recessions, 1960–2011
The chart shows movements in real GDP since 1960. Recessions - periods of falling real GDP - are shown as shaded areas. On average, the annual rate of growth of real GDP over the period was 3.1% per year.
Real GDP clearly grew between 1960 and 2011. While the economy experienced expansions and recessions, its general trend during the period was one of rising real GDP. The average annual rate of growth of real GDP was about 3.1%.
During the post–World War II period, the average expansion has lasted 58 months, and the average recession has lasted about 11 months. The 2001 recession, which lasted eight months, was thus slightly shorter than the average. The 2007–2009 recession lasted 18 months; it was the longest of the post–World War II period.
Economists have sought for centuries to explain the forces at work in a business cycle. Not only are the currents that move the economy up or down intellectually fascinating but also an understanding of them is of tremendous practical importance. A business cycle is not just a movement along a curve in a textbook. It is new jobs for people, or the loss of them. It is new income, or the loss of it. It is the funds to build new schools or to provide better health care - or the lack of funds to do all those things. The story of the business cycle is the story of progress and plenty, of failure and sacrifice.
During the most recent recession, the job outlook for college graduates deteriorated. According to a National Association of Colleges and Employers study, 20% of college graduates seeking jobs were able to obtain one after graduation in 2009. In 2010, that percentage rose to 24%, but the average salary had slipped 1.7% from the previous year. The unemployment rate for college graduates under age 25 rose from 3.7% in April 2007 to 8% in April 2010. Over the same two-year period, the unemployment rate for high school graduates who had never enrolled in college rose from 11.4% to 24.5%.
The effects of recessions extend beyond the purely economic realm and influence the social fabric of society as well. Suicide rates and property crimes - burglary, larceny, and motor vehicle theft tend to rise during recessions. Even popular music appears to be affected. Terry F. Pettijohn II, a psychologist at Coastal Carolina University, has studied Billboard No. 1 songs from 1955 to 2003. He finds that during recessions, popular songs tend to be longer and slower, and to have more serious lyrics. "It's 'Bridge over Troubled Water' or 'That's What Friends Are For'," he says. During expansions, songs tend to be faster, shorter, and somewhat sillier, such as "At the Hop" or "My Sharona".
In our study of macroeconomics, we will gain an understanding of the forces at work in the business cycle. We will also explore policies through which the public sector might act to make recessions less severe and, perhaps, to prolong expansions. We turn next to an examination of price-level changes and unemployment.