Lecture Notes on Real GDP and Business Cycles

Introduction to Real GDP

• Definition of Real GDP: An actual measure of the goods and services produced by an economy, reflecting true productivity.
• Axes for Plotting:
  • X-axis: Time
  • Y-axis: Real GDP

Assumptions of Economic Growth

• Population Growth:
  • Most countries experience growing populations over time.
• Productivity Improvement:
  • Productivity refers to how much each individual can produce.
  • Key drivers of productivity increase:
    • Technology advancements
    • Discoveries of resources
    • New business processes

Long-term Economic Trends

• With growing population and improving productivity, the long-term trend of real GDP is expected to increase.
• Graph Representation:
  • Expected to show a smooth upward trend over time.

Short-term Fluctuations in Real GDP

• Business Cycle:
  • Short-term fluctuations around the long-term trend.
  • Real GDP may rise above or fall below the trend line, leading to cycles of growth and recession.
  • Phases of the Business Cycle:
    • Expansion: Economy is growing (highlighted in green).
    • Recession: Economy is shrinking (highlighted in purple).
      • If severe, may be categorized as a depression.

Characteristics of the Business Cycle

• Unpredictability:
  • Business cycles do not follow a predictable pattern.
  • Inconsistent time intervals between peaks and troughs.
• Economic Models:
  • Next videos will explore models explaining business cycles, focusing on aggregate demand and supply.
  • Important to view models critically, as they often oversimplify complex economic factors.

Role of Human Emotions in the Business Cycle

• Importance of Human Emotion:
  • Emotional aspects influence economic cycles significantly.
  • Traditional economics may overlook emotions like fear and greed, which can affect market behavior.
• Cycle of Emotions:
  • During expansion, individuals may be skeptical initially but grow confident over time.
  • As the economy grows, risk underestimation can lead to poor investment decisions.
  • When economy declines, fear grows, leading to layoffs and further recession.

Emotional Phases During Economic Cycles

• Phases of Sentiment:
  1. Optimism: During early expansion; cautious investment.
  2. Excitement: Growing confidence in the economy.
  3. Thrill: Height of economic growth; heavy investment.
  4. Euphoria: Overconfidence leads to risky investments.
  5. Anxiety: Signs of potential downturn emerge.
  6. Denial: Refusal to accept that a recession is occurring.
  7. Fear: Panic selling and cutting back on spending.
  8. Capitulation: Total acceptance of negative economic conditions.
  9. Despondency: Long-term pessimism affects sentiment.
  10. Hope and Relief: Signs of recovery start to emerge again.
  11. Return to Optimism: As the cycle continues, confidence builds again.

Conclusion

• Human emotions play a crucial role in the business cycle, affecting investment decisions and market behavior, but are often left out of classical economic models.