Short-term economic fluctuations

Problem 2. Duration of expansions and contractions.

Data on the dates and duration of expansions ("booms") and contractions ("recessions") are available from the
National Bureau of Economic Research .

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

Output Gap = Y* - Y = Potential GDP - Actual GDP

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"
Go to Bureau of Labor Statistics to fill in the following table:

Year Teenage unemployment Adult women Adult men
2002 15.6 5.0 5.0

(See the powerpoint slides for the percentage of each group in the work force)

Problem 5 -- Okun's law
Arthur Okun found the relation between output gap and unemployment rate to be:

(Y* - Y) / Y* = 2 (u - u*)

Use that relationship to complete the following table: (completions are in bold
Note that: