Monthly Archives: January 2014

Equilibrium Business Cycle Models?

I didn’t choose to research business cycle models because I thought it would be fun or easy. I know nothing about the topic even after three days of reading though the Macroeconomics Reader. To be honest I chose this topic because when I hear the term “business cycle” I think of structure, something established and easily predictable. I like structure, so naturally I felt that I would like this theory. It made sense in my head at the time.

I just finished reading Charles Plosser’s article “Understanding Real Business Cycles” from the 1989 Journal of Economic Perspectives. The biggest point I have been able to take away from that first read-through is that real business cycle theory “remains an incomplete theory of the business cycle (page 416).” I kept wondering: If the theorists don’t yet understand this fully, how can I? Much of the chapter was riddled with graphs, tables, and calculations which, quite frankly, I did not understand at all.

The fact that I cannot seem to wrap my sophomore, econ major brain around equilibrium business cycle models does not mean I would rather research a different topic. In fact, it makes me want to try harder to understand it. Maybe I just have to put even more time and concentration into it. After all, my fellow classmates will not be able to learn this theory if  do not fully grasp it.

So tomorrow we will be locking into our topics. I plan on sticking to business cycles and making sure I know it forward and backward come presentation day. The hardest part of this process, I think, will be describing the topic in two sentences according to what I know so far in tomorrow’s class.

I hope everyone is enjoying their topics and having an interesting time. I certainly am.

 

The Federal Budget, Per Person

In case anyone is interested, here is a breakdown from the New York Times of the $1.1 trillion spending bill passed last week.

http://www.nytimes.com/interactive/2014/01/19/us/budget-proposal.html?smid=tw-nytimes

Consumption vs. Investment: What drives the economy?

Knowing that we will be discussing Keynesian Economics any day now, I was pleased to read John Papola’s article “Think Consumption is the ‘Engine’ of our Economy? Think Again.” Known for creating the hilarious yet educational videos “Fear the Boom and Bust” and “Deck the Halls with Macro Follies,” Papola provides a simple explanation of the downfall of Keynesian Economics. The title of the article zooms in on his major point which is that consumption is not the driving force of the economy as Keynes assumed. Rather, it is the other piece of the GDP composition, investment, that leads to economic growth.What I like about Papola’s approach to bashing Keynesianism is that he is able to make economic theory real for readers. It is one thing to draw the models over and over again, but when you see that Keynesian Economics has failed in a real person’s own experience, it suddenly clicks. He tells the tale of a cloth diaper business which he and his wife started up and after devoting an entire year to designing and planning, Papola asserts: “Consumption didn’t create our output. Investment did.” Investment must take place in order to create the goods and services demanded for consumption. Quite simply, wealth must be accumulated before we can go out and spend it. I recommend this article as well as Papola’s videos to anyone who is looking for a simple and amusing breakdown of what is wrong with Keynesian Economics.