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Business Cycles, GDP, , & Productivity

What goes up, must come down? People have been fascinated with fluctuations in the economy as long as history can record. One of the most famous stories in the Bible is about Joseph (best known for his coat of many colors). But Joseph's rise to power in Ancient Egypt was a product of a dream that he shared with Pharaoh. In the dream, he foresaw seven good years, followed by seven bad years. Based on this dream, Egypt stored grain during the good times; this got the country through the hard times.

Some of the great thinkers among ancient Greeks and Romans also lent their brainpower to the ebb and flow of commerce in their societies. Later, the Scholastics, a group of learned Roman Catholic writers during the Middle Ages, tried to derive economic principles from moral and natural law. In their view, booms and busts flowed from God rather than from policy. As feudalism disappeared, and mercantilism began to dominate economic thinking beginning in the 16th century or so, economic prosperity was attributed to a surplus of exports over imports. (It should be noted, however, that "prosperity" was taken to mean for the upper classes only. Many of the upper crust thought that excessive wages for laborers would only lead to laziness and general moral decline.) During the next few hundred years, economic theory paid more attention to applying the scientific method to matters of rather than cyclical fluctuations. By the dawn of the 20th century, Classical was the prevailing theory. In this school of thought, the macro-economy is self-adjusting, and disturbances from a full-employment-full production state are transitory.

By the middle of the 1930s, the problem with this thinking was evident. Most of the industrialized world was in the depths of an employment crisis, which we now refer to as The Great Depression. , arguably the greatest of the 20th century, is best known for his theoretical approach to this situation. His 1936 seminal work, The General Theory of Employment, Interest and broke with Classical economics, identifying specific governmental policy prescriptions to smooth out the ups and downs.

While Keynes' reasoning about business cycles sparked lively – sometimes heated – debate among that followed him, the fact remains that these cycles have a profound impact on the quality of human life. During economic downturns, a whole host of social problems ranging from alcohol abuse to violent criminal activity get worse.

When the Depression hit, Presidents Hoover and Roosevelt knew they had an extremely serious set of problems to address, but had very little hard data upon which to base their policies. It was not until 1947 that measures of aggregate output became published on a regular basis in the U.S. and Richard Stone were awarded Nobel Prizes in 1971 and 1984, respectively, for their work in developing the national income product accounting that we now take for granted. The best-known NIPA indicator is , or GDP. GDP measures the value of all final goods and services produced within the country's borders, exchanged in the marketplace, but not resold during a period of time. GDP data is calculated, published, and kept by the U.S. Department of Commerce. Go to the U.S. Department of Commerce web page. On the menu on the left side of the page, click on the link for the Bureau of Economic Analysis. Once there, click on GDP and Related Data (under National, at the bottom of the page). Once there, scroll down to Time Series Estimates, and under GDP, click on Percent Change from Preceding Period. You should now be at the National Income and Product Accounts page which gives current and real (-adjusted, 1996 chained) rates of growth of GDP from the preceding period. This information is provided from 1959-1998 annually, and then by quarter. Look through these data, and then answer the following questions:

1. In which years since 1959 has the U.S. economy suffered a reduction in real GDP? For which of these years was there the greatest percentage reduction from the prior year?

2. In which year since 1959 has the U.S. economy enjoyed the greatest year-over-year real GDP growth?

3. A is often defined as two consecutive quarters of negative real GDP growth. Using this definition, identify the periods of time (by quarters) that the U.S. has experienced since 1959.

4. Which two of these recessions seems to have been the most severe?

5. How many quarters has the most recent expansion lasted? The expansion before that one?

Now go to the U.S. Department of Labor's web site. Click on Statistics and Data on the menu on the left side of the page. Once there, click on Bureau of Labor Statistics, and then on Most Requested Series, then on Overall BLS Most Requested Series. This should bring you to Bureau of Labor Statistics: Most Requested Series which provides a checklist and pull-down menus for data series. Check Unemployment Rate (Seasonally Adjusted) - LFS21000000, and scroll down to the pull down menu for Years(s) to Report For. In the pull down menu, choose All Years, then click on the button for Retrieve Data. Look through this series and answer the following questions:

6. During the recessionary periods identified in the questions above, what typically happens to the unemployment rate?

7. Now go back to the checklist page. Check the box for Output Per Hour - Non-farm Business Productivity - PRS85006092, and look through that series (the data provided show the annualized percentage change from the prior quarter). What do you notice happens to productivity during recessions?