The Time Series Figures for the Most Basic of Business Cycle Macro Analyses: What Is to Be Explained and Accounted For

National Income and Components

Real GDP:

Real GDP per Worker:

National Income Components as Shares of Potential GDP

Investment as a Share of Potential GDP:

Consumption as a Share of Potential GDP:

Gross Exports as a Share of Potential GDP:

Imports as a Share of Potential GDP:

Net Exports as a Share of Potential GDP:

Monetary

Price Level:

Inflation Rate:

Interest and Exchange Rates

Nominal Short-Term Safe Rate:

Long-Term Real Safe Rate:

**Long-Term Real Risky Rate:

Real Exchange Rate (Value of Foreign Goods/Currency):

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Notes on Figures

Real GDP

Real GDP: labor productivity times employment
The principal aspect of this graph is long-run growth: the American economy today is eight times the size of the economy of 1950

2.5 times as many workers
3.1 times output per worker

The secondary aspect is the business cycle
The tertiary aspect is speedup and slowdown in the growth trend

 

Real GDP per Worker

Real GDP per worker (in 2009 dollars) was $45,000 per year in 1950 and is $115,000 today
Note the productivity growth speedup of the mid-1990s
And note the productivity growth collapse since 2000

 

Investment Spending as a Share of Potential GDP

The major driver of the business cycle is fluctuating investment spending
This is investment spending as a share of potential GDP
In our simple macro model, I/Y☆
These waves are the business cycles
Note the anemic investment recovery of 2009-present

 

Personal Consumption Expenditures as a Share of Potential GDP

In the language of our simple macro model, this is C/Y☆
When Y is low relative to Y☆, C/☆ is low as well
C/Y☆ was low in the business cycle troughs of 2009, 1992, 1982, 1975, 1970, 1960, etc.
The medium-term rise in C/Y☆ as the U.S. becomes a save-and-invest-less country

 

Gross Exports

Demand for U.S. exports has risen massively since 1950: from 5% to 13% of national income and product
When the value of foreign currency/bonds is high, exports boom
When the value of foreign currency/goods is low, exports are depressed

 

Gross Imports

Imports have risen from 4% to 16% of national income and product since 1950
���Globalization��� and ���hyperglobalization���

The coming of the container ship
The tripling of world oil prices in the 1970s a big moment
As is the great expansion of world trade with the coming of the internet

Value chains
The China shock

 

The Trade Balance

Net exports are a balancing item: you have to add them to C+I+G to get total spending on domestically-produced goods
The high interest rates of the 1980s that drove the value of foreign currency up led to a large negative swing in net exports
So did the optimism about America of the dot-com boom, and the so-called ���strong dollar policy���
Most of all, however, the medium-term shift in the trade balance is due to the savings shortfall

Largely induced by large government deficits

 

Short-Term Safe Nominal Interest Rate: Treasury Bills

The interest rate the Federal Reserve can nail: the short-term safe nominal interest rate
Note the regular cycles as the Federal Reserve tries to ���lean against the wind���
Note the impact of the inflationary wave of the 1970s on the Treasury bill rate the Fed thought was appropriate
Note the extended time at the zero lower bound in the 2010s

 

Long-Term Safe Real Interest Rate

Subtract the current inflation rate and add on the term premium���the difference between the 3-mo. T-bill and the 10-yr. T-bond rate���and get what current and expected future Federal Reserve policy have on incentives for investment
Note the:

Substantial tightening of the early 1970s
Loosening of the mid 1960s
Volcker disinflation of the early 1980s
The Greenspan preemption of the mid 1990s
The great easing of policy at the end of the 2000s

 

Long-Term Risky Real Interest Rate

But the interest rate that actually matters for the determination of investment is the long-term real risky interest rate
The safe rate plus the risk premium assigned by financial markets
See the sharp tightenings coming from Federal Reserve policy and the financial system in:

the late 2000s,
the early 1980s, and
the early 1970s

 

Real Exchange Rate

Dollar pegged to other currencies under the Bretton Woods system until the early 1970s
Since then, three major dollar cycles
Exports drop (and manufacturing hammered) when the value of foreign currency/goods falls

Reagan deficits
Internet/China
���Taper tantrum���
Trumpenomics

 

Price Level

Headline and core
Cumulative and compounded 7.5-fold inflation since 1950

Consumer prices today 2.5 times what they were in 1984
Consumer prices in 1950 1/3 what they were in 1984

2.5% per year

 

Inflation Rate

Consumer Price Index

Not PCE���

���Headline��� and ���core���

Current core a better forecast of future headline than current headline is

Korean War
Mid-50s to late 60s
The 70s inflation
���Opportunistic��� disinflation
The era of the zero lower bound