Macroeconomics: A Fresh Start – Chapter 14, Business Cycles
Keynesian Perspective on Market Forces
Reading Keynes At The Zero Lower Bound: The Great Depression, The Liquidity Trap, And Unconventional Policy
Leading Indicators OECD: Reference Series: Gross Domestic Product
MR University – “Game of Theories: the Keynesians” in Principles of Economics
MR University – “Game of Theories: Real Business Cycle”
MR University – “Game of Theories: Austrian Economic Theory”
MR University – “Game of Theories: The Monetarists”
Starting Point Teaching Entry Level GeoScience, “Think Pair Share”
Business Cycles: Course Map & Recommended Resources
It is typical to see economic activity pick-up around the holidays or harvests. For example, every year, the Chinese and some other East Asian cultures celebrate Spring Festival or what is known as “Chinese New Year”. People travel to their home village, buy gifts and celebrate with elaborate family meals. Consumption rises before and falls after the festivities are over. Economic fluctuations due to seasonal demand factors are one thing, but modern economies experience ups-and downs for a host of reasons including shocks such as droughts or economic crises. One of the main reasons for economic downturns is the breakdown in some aspect of the economic mechanism. In this section, students will be introduced to the basic definition of a business cycle, learn how to define the different phases of the cycle, and explain the different mechanisms that give rise to recessions.
- Identify the phases of the business cycle (TAG 4)
- Relate business cycles to the overall long run trend in real GDP (TAG’s 4,5,13)
- Discuss Great Depression and classical view that we would recover “in the long run” (TAG’s 4,10)
- Differentiate the Great Recession and Great Depression (TAG’s 4,10)
NOTE: This Module meets Ohio TAG's 4, 5, 10, 13 for an Intro to Macroeconomics Course
Recommended Textbook Resources
There is very limited discussion of the business cycle in the OpenStax text. What exists is limited to a table on GDP where they use the NBER definition to discuss recessions as “interruptions” in long run growth. Hence, OpenStax covers Learning Objectives 1 well. For the remaining learning goals, Dorman points out that the cycles are an empirical fact that can be seen as a result of particular institutional structures in a given economy. As such, these cycles will vary over space and time. Instructors that would like to discuss the business cycle from multiple perspectives (Marx, Keynes, and Minsky) will enjoy Dorman’s chapter. The discussion gives a balanced view of each and the limitations and learning objective 2 and 3. The focus is mostly on the US.
Principles of Macroeconomics 2e: Chapter 6.3. Authored by: S. Greenlaw and Shapiro et al. (June 4, 2018). Provided by: OpenStax CNX.
- Springer Texts in Business and Economics. Authored by: Peter Dorman. Provided by: Springer-Verlag Berlin Heidelberg (2014). Page Numbers: 323-342
Also, to get a nice explanation of Objective 3 see: Keynesian Perspective on Market Forces
- Principles of Macroeconomics 2e: Chapter 12.4. Authored by: S. Greenlaw and Shapiro et al. (June 4, 2018). Provided by: OpenStax CNX.
To cover Learning Objective 4 see: Reading Keynes At The Zero Lower Bound: The Great Depression, The Liquidity Trap, And Unconventional Policy
- Journal of the History of Economic Thought. Authored by: R. Sutch (2018, March 13).
Supplemental Content/Alternative Resources
Macroeconomics: A Fresh Start – Chapter 14
- Springer Texts in Business and Economics. Authored by: Peter Dorman (2014). Provided by: Springer-Verlag Berlin Heidelberg.
Has the Business Cycle Changed and Why?
This article quantitatively evaluates and notes that the US business cycle became less volatile after 1984. This period is referred to as the “Great Moderation”. It evaluates the different arguments that have been proposed to understanding the structural causes of the moderation.
- Authored by: James H. Stock and Mark W. Watson. Provided by: NBER Macroeconomics Annual. Page Numbers: 159-218.
Political Cycles in OECD Economies
This article evaluates the so called political business cycle theory for a sample of OECD countries. Models of political cycles emphasize either the"opportunistic" or the "partisan" incentives of policymakers. In "opportunistic" models, the policymakers pursue expansionary policy that raises GDP to maximize their popularity. In "partisan" models different political parties represent the interests of different constituencies. For example when in office, the left wing parties are more concerned with the problem of unemployment, while the right wing parties are relatively more willing to bear the costs of unemployment to reduce inflation.
- Review of Economic Studies, vol. 59(4). Authored by: Alberto Alesina and Nouriel Roubini (October 1992). Provided by: Blackwell Publishing. Page Numbers: 663-88.
The goal of this exercise is for students to develop familiarity using the language of business cycles to enumerate, explain, and understand the fluctuations in the business cycle of Japan. The questions are designed in order of increasing conceptual difficulty. If the instructor wants to evaluate learning goal one using a quantitative research exercise, it may be best to just assign questions 1 and 2 below.
Exercise Title: Understanding the Japanese Business Cycle
- Go to the FRED Database.
- Construct a chart of GDP Growth and the Unemployment Rate for Japan that is similar to Figure 14.1 in Dorman. (Hints: Look for quarterly data from the 1960’s such as “Leading Indicators OECD: Reference Series: Gross Domestic Product” and find a corresponding unemployment rate.)
- Pick a recessionary period (Hint: FRED reports “OECD based Recession Indicators for Japan from the Peak through the Period preceding the Trough”. Discuss general trends that you notice that relate to the discussion in Dorman.)
- Research and discuss the causal factors that gave rise to one recessionary period.
Active Learning Exercise
Alex Taborak has a series of videos that explain the Keynesian, Real Business Cycle, the Monetarists, and Austrian business cycle theories. These videos could be used to go deeper into learning goals 3 and 4. Students could be assigned to watch one or two of these videos and compare and contrast two different theories in a simple “Think-Pair-Share” exercise. For the videos see (from MR University):
- “Game of Theories: the Keynesians” in Principles of Economics
- “Game of Theories: Real Business Cycle”
- “Game of Theories: Austrian Economic Theory”
- “Game of Theories: The Monetarists”
Important Notes for the instructor regarding this exercise:
See this resource at SERC’s Starting Point Teaching and Learning Economics for best practices in think-pair share: Starting Point Teaching Entry Level GeoScience, “Think Pair Share”