Academic journal article Monthly Labor Review

Business Cycle Analysis

Academic journal article Monthly Labor Review

Business Cycle Analysis

Article excerpt

Policymakers and business managers alike must regularly face the challenge presented by the recurrent cyclical fluctuations in the U.S. economy. Understanding the business cycle is crucial to both: policymakers must make decisions about monetary and fiscal policy in an effort to smooth out the cycles, while profit-maximizing managers must make informed decisions about their individual firms during the various stages of the business cycle. In "How the U.S. economy resembles a (very) big business" (Economic Perspectives, Federal Reserve Bank of Chicago, third quarter 2008), senior Bank economist Jeffrey R. Campbell analyzes the fluctuations in U.S. economic growth by treating the U.S. economy as a very large business. This fictional business employs all of the workers in the U.S. economy, owns all of the capital, and returns all of its profits to its "shareholders," the U.S. public. Campbell presents tools for evaluating the contributions of particular product lines to U.S. economic growth and the effect they have on the business cycle. He extends his analysis by using the same tools to measure a large firm's exposure to macroeconomic risks.

Campbell employs two macroeconomic concepts to assess the contributions to overall economic growth made by particular sectors, as well as the sustainability of that growth: the fundamental national product accounting identity, which divides the total value of goods and services produced by the economy into discrete expenditure components, and the contributions to growth formula, which equates the rate of GDP growth with the sum of the individual component growth rates multiplied by their share of expenditures in the previous quarter. …

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