EC-311-TEST1

Three Primary Assumptions about Production Functions:

More of any input yields more output. If already using a lot of one input, you will get less additional output. All factors make the other factors more productive.

Which component of PDI is the largest?

Nearly 1/3 of PDI comes from Equipment.

How does nominal GDP generally behave over time?

Nominal GDP is almost always increasing.

Great Recession unemployment rates.

November 2007 = 4.7%. December 2007 = 5.0% (Large Spike Up; Concerns about "Subprime" Loans). June 2009 = 9.5% (Peaked at 10.0% in October 2009 (ANOTHER Jobless Recovery?).

What is the largest component?

Over 60% of government spending derives from state and local spending. Over 20% comes from spending on national defense.

Revenues=

P*Y Where P is $1 unit. Where Y is firm's total output/ firm production (Theory of firm production).

What were the peaks and troughs for GDP growth when including the COVID recession??

Peak: +33.4% Trough: -31.4%

From 1960 - 2019, what were the peaks and troughs for GDP growth?

Peak: 16.4% in the second quarter of 1978 Trough: -8.4% in the last quarter of 2008

What volatility of GDP about during the 21st century in comparison to the Great Moderation?

It's more than twice as volatile - in fact, slightly more volatile than 1960 - 1983.

Questions about Labor Market Participation and Employment Status Recent Data on Unemployment Rates:

January 2021 = 6.3% December 2020 = 6.7% November 2020 = 6.7% May 2020 = 13.3% April 2020 = 14.8% March 2020 = 4.4% February 2020 = 3.5%

How does the size of the economy in Japan, Germany, and The U.K. compare to the United States?

Japan: 5.1/21.4 => around 25%. Germany: 3.9/21.4 => almost 20%. U.K.: 2.8/21.4 => almost 14%

How do Macroeconomists characterize the different factors that affect total output in the economy?

L- Labor (Hours/ # of workers). K- Capital (Equipment/Sophomore). A- Total Factor (Productivity).

If L, "High"...

MPL"Low."

2001 Recession Unemployment rates.

March 2001 = 4.3%. November 2001 = 5.5% Peaked at 6.3% in June 2003 (Due to the "Jobless" Nature of the Recovery).

COVID February 2020 unemployment rates.

March 2020 = 4.4% April 2020 = 14.8%

AVG rate of growth In the 21st Century?

1.9%

Highest Unemployment Rates 1960 - 2020:

14.8% (April 2020) 1960 - 2019: 10.8% (1982) "Great Recession": 10.0% (October 2009 - after the Great Recession was over).

What is the average rate of economic growth in the United States since 1960?

3.0%

Rate of growth during the Great Moderation?

3.3%

What was the average rate of growth from 1960 -1983?

3.6%

Long-Term Unemployed (27 weeks +) =

4.0 million (Jan 2021). 1.2 million (Jan 2020).

Part-Time Employed for Economic Reasons ("Underemployed) 6.0 million (Jan 2021)

4.3 million (Jan 2020). Marginally Attached = 1.9 million (Jan 2021); 1.3 million (Jan 2020) . Discouraged Workers = 624,000 (Jan 2021); 335,000 (Jan 2020).

What was the average inflation rate in the 24 year period before the Great Moderation?

5.3%.

Household Survey (Labor Supply Side of the Market).

60,000 households.

Measures of Slack/Lack of Participation January Labor Market Participation rate.

61.4% .

Questions about Labor Market Participation and Employment Status January 2021.

= 6.3%. But, it varies... a. Across demographic groups (Teenagers highest). b. Across the skill distribution (Bachelor's Degree + 4.0%; Less Than HS = 9.1%.

Measures of Slack/Lack of Participation Labor Market Participation Rate.

= 61.4% (Jan. 2021) 63.4% (Jan. 2020).

For macroeconomists, we generally aggregate to three different factors:

A (Total Factor Productivity). K (Physical Capital: Equipment, Sophomore, Trucks..). L (Labor: Employees/ Total Hours).

Unemployment rates vary across demographic groups.

Adult Men = 6.0% Adult Women = 6.0% Teenagers = 14.8%

If L, "Low,"...

MPL"High."

Unemployment rates also vary across the skill distribution.

Among individuals 25 years and older (5.7%). Bachelor's Degree or Higher = 4.0%. Some college/Associates Degree = 6.2%. High School Graduates (No college) = 7.1%. Less than High School = 9.1%.

How much does private domestic investment (PDI) account for GDP?

Around 1/6 comes from Private Domestic Investment.

How did productivity growth perform from 2010 - 2019?

As we previously said, it was a low 1.0%.

What is the largest individual category of equipment investment? The second largest?

Based upon the data from 2007, the largest category is communication equipment at a little over 4% of overall investment. The second largest category is computers and peripheral equipment.

What about during the Great Moderation?

During the Great Moderation, there were only TWO recessions within nearly 25 years. That is, recessions only occurred every 12 years or so. And, the 2001 Recession was extremely mild.

How did productivity growth perform during the Great Moderation?

During the Great Moderation, there were some swings in productivity growth. Productivity growth accelerated from less than 1% in 1987 until it peaked at an average of 4.5% in 1992. It stagnated in 1993 but consistently accelerated from 0.1% in 1993 to a peak of 4.3% in 2002. From 2003 - 2007, productivity continued to expand but the rate of growth was much lower than in the first few years of the decade.

What do these assumptions about Production Functions represent?

Each factor has a positive marginal product. MPL>0 MPK>0

How did the first three years of economic performance compare to the rest of the decade (1980's)?

Economic growth improved dramatically beginning in 1983. It remained generally above 2.5% during the latter half of the decade.

What about the total volume of trade (exports + imports) relative to GDP? What is the role of the trade deficit (imports - exports)?

Exports were around $2.1 trillion. Imports were around $2.8 Trillion. So, the total volume of trade is about 1/4 of the size of GDP. However, the trade deficit only makes up around 3.3% of GDP in the United States according to the most recent data.

Summary of Production Theory:

Factors have positive marginal products. Due to diminishing returns, the marginal product for each factor slopes down. Productivity growth shifts out the MP curve for each factor because it alleviates diminishing returns to each factor.

Over the long-run, what are the peaks and troughs for equipment investment?

Ignoring the COVID era, the peak was +40% and the trough was -40% (which occurred during the Great Recession).

What was the average rate of growth? What was the rate of growth in the first two quarters of 2020?

In the first quarter, it was -5.0%. It surged to -33% due to restrictions from COVID. Over the past four quarters, the average rate of growth is just 2.1%. Over the previous year, the growth rate was higher and matched the long-run growth rate of the economy at 3.1%.

What is the Federal Reserve's current preferred measure for core-inflation?

Inflation as measured by the core for personal consumption expenditures is preferred by the Federal Reserve because it accounts for how people adjust their consumption when prices change. From this perspective, it factors in both "substitution" and "income" effects from changes in prices.

What was the average inflation rate during the Great Moderation?

Inflation during the Great Moderation was equal to 3.1%. So, it was over 40% lower than in the previous 24 years.

What has been the average inflation rate in the 21st century (from 2000 - 2020)?

Inflation has continued to fall, down to annual average of 2.1% - almost 1/3 lower. So, the inflation picture since the beginning of the 21st century looks close to what was observed in the 1950s.

What was the peak rate of contraction? When?

Investment contracted at a 50% clip during the 1973-1975 Recession. The contractions during the Great Recession were the largest (around 30% and 40%) since the recession from 1973-1975. That is, it had been nearly 40 years since the capital sector witnessed such decline in the United States.

How do workers contribute to a firm's output?

It depends on a firm's production function. Definition: Describes a firm's total output depending on the utilization of different factor inputs. The production function, Y=A*F(K,L).

What was the highest inflation rate that occurred during the Great Moderation period? When did it take place? How long did it take for inflation to rise back to this peak?

It didn't! The closest was 5.6% in July 2008.

How did the volatility of GDP growth during the Great Moderation compare to the previous 24 years?

It was half as volatile (as measured by the standard deviation).

How did the first recession compare to the average recessions (21st century)?

It was very mild - the only quarter completely a part of the recession had a contraction of just 1.7%.

What was the average rate of productivity growth during the 1960s?

Productivity growth in the 1960s was strong, averaging almost 3% at 2.8% during the decade. It appears that productivity growth was likely behind the strong growth of GDP (4.5%) during the 1960s.

How often and by how much does productivity contract from 1960-1983?

Productivity growth is often negative. In fact, over this timeframe, there is a loss of productivity in nearly 25% of the quarters. The losses are often significant - there are seven quarters (nearly two years of data) where the productivity losses exceed 4%..

What was the performance of productivity growth during the two recessions in the 1980s?

Productivity growth turned negative for four quarters from 1980-1982. It played an important role in the two recessions that occurred at the beginning of the decade. Productivity growth improved in the mid 1980s but then deteriorated during the second half of the decade.

What did productivity growth look like during the 1990-1991 Recession?

Productivity growth turned negative in the fourth quarter of 1990, during the 1990-1991 recession. But, it rebounded strongly in 1992 shortly after the recession.

How did productivity growth look during the two recessions in the decade?

Productivity growth was negative occasionally in 1960 which is part of the reason for the recession from 1960-1961. Productivity growth began to decelerate during the latter part of the decade, turning negative in 1968 for the next three years. Thus, the contraction coincided with the recession of 1969-1970.

Describe the behavior of residential fixed investment prior to the Great Financial Crisis.

Residential investment began to contract in the last quarter of 2005. From there it contracted for 15 CONSECUTIVE QUARTERS - NEARLY FOUR YEARS. A significant rebound did not occur until the last quarter of 2010. Thus, the housing sector was in "recession" for five years.

How big is the U.S. economy:

Roughly four times the size of Japan. More than five times the size of Germany. More than seven times larger than the U.K.

Did the economy experience a recession in the 1990's? How did it compare to other recessions?

Similar to the 1980s, the economy began the 1990s by entering a recession. It was relatively short (8 months). Wasn't as destructive as the recessions in the early 1980s (the largest contraction in a quarter was only 3.4%).

How has the role of the housing sector for investment and GDP changed in the last ten years or so?

Since the 'Great Recession?' In 2005, Residential fixed investment accounted for over 30% of PDI. So, it's less important than it was before the recent financial crisis.

What have been the recent observations for the core-inflation rate relative to the target since the end of the Great Recession? What does this imply about the potential direction for monetary policy?

Since the end of the Great Recession, core-PCE inflation has nearly always been below the Federal Reserve's 2% target.

Long-Term Unemployed Part-Time Employed for Economic Reasons Marginally Attached and Discouraged Workers B. Establishment Survey (Labor Demand Side) .

Surveys around 140,000 different businesses and nearly 700,000 different worksites. 2. Aggregate Payroll Employment = +49,000 jobs but results vary across industries. 3. Hours Worked = 35.0 hours per week. 4. Average Wages = $29.96.

What was the average growth rate of GDP during the 1980s?

The 1980s represented a period which had nearly the same average growth as the previous decade (3.2%), but it was marked by two very different sub-periods of economic performance.

Why is the Consumer Price Index often used as an indicator of inflation? How often is the data calculated?

The Consumer Price Index is the most often used indicator of inflation because consumer spending is the largest component of GDP and the indicator is calculated at the monthly frequency.

What was the average rate of productivity growth during the Great Moderation? How does it compare to the previous time-frame?

The average rate of productivity growth during the Great Moderation was 2.2% which is the same as the previous 24 years. This initial observation would seem to cast doubt on whether productivity growth was an important driving force behind the Great Moderation.

What was the average rate of productivity growth during the 1990s? How did it compare to the other time periods?

The average rate of productivity growth improved to 2.1% during the decade. This is part of the first surge of productivity growth that occurred during the Great Moderation.

Since 1950, how long does the average recession last? How did the 2001 and Great Recessions compare to the average?

The average recession in the United States during the postwar period lasts around 11 months. The 2001 Recession was shorter than average. By comparison, the Great Recession is the longest recession on record since the Great Depression and exceeded the average length by over one-half of a year.

What is the economy's "core-inflation rate?" How does the general behavior of core inflation compare to overall inflation?

The core-inflation rate excludes food and energy prices. These are commodities and they tend to be more volatile than other parts of the "consumption basket." However, it tends to track overall inflation since energy prices eventually push up production prices.

What about the performance of the labor market? For example, how did the unemployment rate respond to changes in productivity growth in the years prior to the Great Moderation?

The decline in productivity growth from 1960 through 1983 coincided with a deteriorating labor market. From the lowest point in 1966 at 3.6%, the unemployment rate continued to rise until it peaked at nearly 11% (10.8%) towards the end of 1982. Hence, it appears that productivity growth is an important component of labor market performance. As productivity growth fell, the unemployment rate increased.

How did the performance of GDP during the 2001 recession compare to the other recessions?

The economy actually expanded slightly during the 2001 recession.

What was the average growth rate of GDP during the 1970s?When did the economy experience a recession? How did the length of the recessions compare to the average?

The economy began the decade in recession again. The 1970s were a period of slower growth marked by a relatively long recession, 15 months, from 1973-1975.

When did recessions occur during the first decade of the 21st century?

The first decade of the 21st century was similar to the previous decades in that the economy experienced a recession in the early part of the decade. The 2001 recession began in March and ended in November, lasting only 8 months.

How did the length of the recessions compare to the average (1980's)?

The first one was really short and the second was 6 months longer.

How does the behavior of the investment component of GDP compare to GDP? Which one looks more stable?

The investment component of GDP is the most volatile sector of the economy. As we previously observed, aside from the COVID period, GDP growth swung from around +16.5% and -8.5% since 1960 with an average growth rate of 3.0%. Including COVID, the standard deviation was around 4.5%.

What is the trend rate of growth for residential investment over the long-run?

The long-run growth rate is 3.5%, but the average for the 21st century is much lower at just 1.6%.

Are there any exceptions to the general trend? Why?

The shaded areas indicate recessions.

From 1960-2020, what was the peak rate of growth in residential investment? When?

The swings are even more dramatic than the overall pattern of investment activity. There is very strong growth following the 1981-1982 recession where it increased at a nearly 90% rate.

What was the average rate of economic growth during the 1960s? 2. Did the economy experience a recession? When?

Though the average rate of growth in the 1960s was rather high, there were two recessions. The first one was at the beginning of the decade from 1960-1961 (which lasted for ten months). The second one started at the end of the decade from 1969-1970 (lasting 11 months).

When did the economy experience a recession (1980's)?

To begin, the economy experienced two different recessions within about a one-year period. The first was a recession in 1980 that was very short, only 6 months long. The second was a recession in 1981-1982 which lasted 15 months. So, the economy was in recession for the first 21 out of 36 months in the early 1980s.

Profits(P)=

Total Revenue (TR)-Total Costs(TC). TR=P*Y TC is composed of Labor Costs (W) and Costs of Capital (R). "Rental Rate for Capital" ex. Rent on a commercial building. Profits(P)=(P*Y)-wL-R*K.

How did the average growth rate of productivity in the 1970s compare to the 1960s? Does this have any implications for GDP growth?

Unfortunately, the 1970s are known as a period where there was a significant "productivity slowdown." The average growth rate of productivity was almost a percentage point lower at 2.1%.

Are there any patterns that emerge by comparing the rates over each decade?

We've seen that productivity growth was generally declining from the 1960s to the 1970s to an even slower pace in the 1980s.

During the postwar era, has deflation ever occurred in the United States? If so, when? Have there been any deflationary episodes in recent years? How much time elapsed before the deflationary episodes emerged?

Yes, it occurred from 1949-1950 and 1954-1955. Deflation also took place in 2009. It had been over 50 years since the U.S. experienced a deflationary episode and it occurred during the Great Recession. It also emerged in 2015.