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Short-Run vs Long-Run

Short-Run vs Long-Run. National accounts. Think about Canadian GDP over last 50 years Here it is If you had to draw it now without looking at it, what would you draw? Upward Random ups and downs Bigger ups and downs you’d notice if know more about economic history Actual GDP

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Short-Run vs Long-Run

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  1. Short-Run vs Long-Run National accounts

  2. Think about Canadian GDP over last 50 years • Here it is • If you had to draw it now without looking at it, what would you draw? • Upward • Random ups and downs • Bigger ups and downs you’d notice if know more about economic history • Actual GDP • Potential GDP

  3. Actual GDP • Reported by Statistics Canada • Potential GDP • “theoretical” construct • But shows a very “real” thing • The trend • Or LONG-RUN development • How would you determine potential GDP? • That’s what we would have if we… • fully utilized… • all the factors of production… • with the best technology

  4. GDP accounting • GDP = GDP • GDP = (F/F) × (FE/FE) × GDP • GDP = F × (FE/F) × (GDP/FE) • Compare this to English in previous slide: • That’s what we would have if we… • fully utilized… • all the factors of production… • with the best technology • GDP = F × (FE/F) × (GDP/FE)

  5. We have here: • GDP = F × (FE/F) × (GDP/FE) • F = factor supply • (FE/F) = factor utilization rate • (GDP/FE) = factor productivity

  6. How these change: • GDP = F × (FE/F) × (GDP/FE) • F = factor supply • Slow relatively small change in short run • Significant change in long run • Look at labour • population • LFPR

  7. (GDP/FE) = factor productivity • Slow relatively small change in short run • Significant change in long run • Look at labour • productivity

  8. (FE/F) = factor utilization rate • Quick change in short run • Small/no change in long run • it’s like temperature and same problems of predicting • Look at labour • unemployment

  9. Not hard to sum up? • GDP = F × (FE/F) × (GDP/FE) will change if any part of it changes • Short run: • F = factor supply - LITTLE CHANGE • (FE/F) = factor utilization rate – SIGNIFICANT CHANGE • (GDP/FE) = factor productivity - LITTLE CHANGE • Long run: • F = factor supply - SIGNIFICANT CHANGE • (FE/F) = factor utilization rate - LITTLE CHANGE • (GDP/FE) = factor productivity - SIGNIFICANT CHANGE

  10. But think about it: • F = factor supply - determines AS (position of the curve) • (GDP/FE) = factor productivity - determines AS (position of the curve) • (FE/F) = factor utilization rate - determines what point we are at AS • Think AD-AS model: • AS is a curve • A point we are at on AS is determined by position of AD curve • We say that short run fluctuations are demand-driven • We say that long run fluctuations are supply-driven

  11. What does it mean for policies? • A policy that affects AD is targeting short-run… • fluctuations • business cycle • unemployment • factor utilization • A policy that affects AS is targeting long-run… • economic growth • Most policies have both short-run and long-run effects • Think lowering interest rate, e.g.

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