Intro to Business Fluctuations

This wk: Get acquainted with the basics of business fluctuations as we dive back into the final videos of our Macro course.

Next wk: Learn the basics of the aggregate demand-aggregate supply model.

Economic growth doesn’t happen at a steady pace; there are ebbs and flows. Prosperity on the national level depends on a country having good institutions in place. The factors of production – human capital, physical capital, and ideas – are also critical. And these variables often change, sometimes drastically.

In the United States, economic growth has averaged at about 3.2% for the past sixty years. But if you Google “US economic growth FRED,” you’ll quickly see that it’s not a smooth trend up. Instead, there are plenty of peaks and valleys, even though the U.S. has a relatively stable economy. Economists refer to these ups and downs around a country’s long-term GDP growth trend as “business fluctuations.”

“Recessions” are significant and widespread declines in employment and real income. But not only do people become unemployed during a recession, but capital and land often go un- or underused. This suggests that an economy is operating below its potential because resources are being wasted.

Recessions, large or small, are less than ideal states for an economy. We want people and resources well employed to produce more prosperity.

Over the next few videos, we’ll explore the basics of a model of business fluctuations called the aggregate demand-aggregate supply (AD-AS) model. We’ll put the model to use to look at how shocks affect an economy, and what policy can do to minimize the damage. Finally, we’ll apply the model to explain some of the largest economic catastrophes in United States’ history.

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[Alex] A country's prosperity
depends upon good institutions

and the fundamental factors
of production:

Human capital,

Physical capital,

and Ideas.

Economic growth, however,
it's not a smooth process.

An economy advances and recedes,
it rises and falls,

it booms and busts.

Real GDP in the United States,
for example,

it's grown at an average rate
of about 3.2 % per year

over the past 60 years.

But the economy didn't grow
at this rate every day,

or every month, or even every year.

We call the fluctuations
in real GDP

around its long-term trend
or normal growth rate,

Business Fluctuations.

Recessions are significant,
widespread declines

in real income and employment.

Declines in employment
and increases in unemployment --

they are one
of the most significant

economic and personal costs
of a recession.

More generally, during a recession

not only is labor unemployed,

a lot of land and capital

also become unemployed
or underused.

And when we see
a lot of unemployed resources,

that suggests
that resources are being wasted,

it suggests that the economy

is somehow operating
below it's potential.

We'd like to limit
that waste of resources.

We want everyone who wants a job
to be able to get a job.

We want labor and capital
fully employed

to produce a prosperous,
growing economy.

In the next set of videos,

we are going to develop
a model of business fluctuations

called the Aggregate Demand,
Aggregate Supply model.

First, we'll learn
the basics of the model.

Then, we'll use the model
to help us understand

how shocks can disturb an economy

and how policy
might help us to reduce

the size or cost
of business fluctuations.

Finally, we'll apply the model

to explain some of the largest
economic catastrophes in U.S. history,

including the Great Depression.

You're on your way
to mastering economics.

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by taking a few practice questions.

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for more macroeconomics,

click for the next video.

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