Business Cycles and the Dynamics of GDP

1. Business Cycles and the Dynamics of GDP Chap. 27

2. Hong Kong Census & Statistics

3. 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

4. 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. Business Cycles

5. HK GDP vs. HP Estimate of HK Potential GDP

6. GDP is output per worker times number of workers. Labor Productivity GDP and Productivity

7. 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

8. 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

9. Large Variations in Labor per Person (www.ggdc.net)

10. Variation in Labor Force Participation

11. Main Differences in Countries are Due to Variation in Labor Productivity

12. Productivity Catch Up: EuropeSource: Groningen Growth & Development Center 2009 Intl$, GDP per Hour Worked (Y/L)

13. Productivity Catch Up: East AsiaSource: Groningen Growth & Development Center 2009 Intl$, GDP per Hour Worked (Y/L)

14. Productivity Catch Up: Latin AmericaSource: Groningen Growth & Development Center 2009 Intl$, GDP per Hour Worked (Y/L)

15. 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

16. Level of Unemployment in HK Hong Kong Unemployment Rates

17. 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.

18. 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

19. 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

20. 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 US Business Cycle Dates

21. Level of Unemployment in HK Rec. Exp. Rec. Rec. Exp. Exp. Hong Kong Unemployment Rates

22. 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.