VOICE NARRATOR: When we divide the national economy into the basic sections like this, then the output of all goods and services looks like this. It is measured in money terms. GDP equals consumer spending plus physical investment spending plus government purchases of goods and services, plus exports, minus imports.
Consumer spending is the largest flow, around 70% of U.S. GDP, and it is part of the main cycle of money.
People work for income, and spend the money on goods and services. The economy grows over time but there is always a small number of unemployed who are looking for jobs. Let's put them out here.
But sometimes the GDP shrinks, and then workers lose their jobs, creating more unemployment. When this happens, the economy is below potential -- businesses are not filling orders to capacity, and there are people looking for work who can't find jobs.
Since the unemployed aren't earning money, this reduces consumer spending even more. Businesses then lay-off more workers. If the GDP falls two quarters in a row, bust-bust, it is called a recession.
Let's draw a graph. We will show U.S. GDP up the trillions, and from 1930 through the years. The curve of potential GDP reflects the smooth growth of physical capital and labor, projected out to the year 2020. But the real GDP is a lot more ragged. Where it goes downward are the recessions. The biggest dips below potential are the Great Depression, the Volker-Reagan Recession, and the current one, which is already called the "Great Recession".
Let's look at these two, and compare the human impacts. Now what did we do? We took twelve and a half years for each, and we equalized the potentials for size -- and growth, more or less.
We see that the 1930's Depression was devastating.
But around fourteen trillion dollars is a bigger economy, so the output gap below potential was nearly a trillion dollars, and it has barely closed. This is lost work, and it is causing misery and despair for millions of unemployed.
Right now GDP must grow at around two percent a year just to keep the gap from getting larger. We need a higher growth rate, over three-and-a-half percent, to get us back to full employment by the year 2017. Well, what can we do about this?
We know that recessions can be cured by two kinds of policy, monetary policy and fiscal policy.
Monetary policy works on savings and lending. (Of course, we also know the opposite -- firms may lend and households borrow, but we can use the simple case.) The central bank, in this case the U.S. Federal Reserve, gives more money to the deposit banks, which increases the amounts they can lend. This lowers interest rates. Then, firms will borrow more and invest, and households may save less, and spend.
On the other hand, fiscal policy borrows money that was languishing in the financial markets in return for Treasury bonds, and then reduces taxes, and/or increases outlays of any kind. So the government acts like a big public investor, and pays it back, after the growth, from higher taxes. Both monetary and fiscal policy are used for different conditions.
Next we will look at the current Great Recession.
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European Debt Crisis Explainedby CiovaccoCapital14,953 views
great animation and extremely useful, thanks for uploading! :)
imnotstpid 2 months ago in playlist More videos from leearnold