Problem 2. Duration of expansions and contractions.
Although the NBER is a private organization, it is a very prestigious one, and its dating system for recessions and expansions is authoritative. A full explanation of that system is available here. Careful readers will note that the NBER dates depend on considering several factors, including employment, industrial production and overall income -- not just GDP.
Problem 3. Output gap calculation.
The Congressional Budget Office has the most widely accepted calculation of potential output . A description of their methodology is available here .
Figures for actual and potential output and the output gap follow, note that since
a positive output gap is a recession , and a negative output gap is an expansion .
Year | Actual GDP | Potential GDP | Output gap | Percent gap |
---|---|---|---|---|
1988 | 5844 | 5788 | -56 | -0.97 |
1989 | 6056 | 5943 | -113 | -1.90 |
1990 | 6172 | 6102 | -70 | -1.15 |
1991 | 6075 | 6265 | 190 | 3.03 |
1992 | 6214 | 6432 | 218 | 3.39 |
1993 | 6360 | 6604 | 244 | 3.69 |
On the basis of the above table, the years 1988, 1989 and 1990 were years of prosperity, and the years 1991, 1992 and 1993 were years of recession. Note that the NBER does not count 1993 as a year of recession, since it dates a boom from the trough of the business cycle -- and output was recovering, although not yet up to potential.
Problem 4 -- Unemployment rates by age and the "Natural Rate of Unemployment"
(See the powerpoint slides for the percentage of each group in the work force)
Problem 5 -- Okun's law
Use that relationship to complete the following table: (completions are in bold
The first and last rows go naturally together:
Okun's law is that (Y* - Y) / Y* = 2 (U - U*) ,
Okun's law is that (Y* - Y) / Y* = 2 (U - U*) ,
The middle two rows also go naturally together: we can calculate
(Y* - Y) / Y* = - .01. Multiplying through by Y*, we have
Go to Bureau of Labor Statistics to fill in the following table:
Year Teenage unemployment Adult women Adult men
1960
1970
1980
1990
2000
2002 15.6 5.0 5.0
Arthur Okun found the relation between output gap and unemployment rate to be:
Note that:
Year Actual GDP Potential GDP Output Gap % gap NAIRU UNRATE
2001 7,840 8,000 160 2.0 5.0 6.0
2002 8,100 8,100 0 0 5.0 5.0
2003 9,020 8,200 -820 -1.0 4.5 4.0
2004 8,415 8,250 -165 -2.0 5.0 4.0
output gap = Y* - Y = 8,000 - 7,840 = 160 . The economy is in recession .
In percentage terms, the output gap is therefore 160 / 8,000 = .02 or 2 percent.
-- and in this case we have 2 = 2 (U - U*) so that U - U* = 1
The actual unemployment rate is above the NAIRU by 1 percent;
Since the actual rate is given as 6.0, the NAIRU had to be 5.0
output gap = Y* - Y = 8,250 - 8,415 = -165 . The economy is in enjoying prosperity .
In percentage terms, the output gap is therefore -165 / 8,250 = - 0.02 or 2 percent.
-- and in this case we have -2 = 2 (U - U*) so that U - U* = -1
The actual unemployment rate is below the NAIRU by 1 percent;
Since the NAIRU is given as 5.0, the actual rate had to be 4.0
the percentage output gap as 2(U - U*) and then find the value of Y and Y*.
The output gap is therefore zero which in turn means that Y = Y*
Hence the output gap will be minus one percent , or
(Y* - Y) = - .01 Y*; so using the fact that Y* = 8,200, we have
8,200 - Y = - 82, and rearranging terms:
Y = 8,200 + 82 = 8,282