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- Sep 25, 2007
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Hi all,
An article from the Economist Magazine. Excerpts
THERE has been a nasty outbreak of R-worditis. Newspapers are full of stories about which of the big economies will be first to dip into recession as a result of the credit crunch. The answer depends largely on what you mean by "recession". Most economists assume that it implies a fall in real GDP. But this has created a lot of confusion: the standard definition of recession needs rethinking.
To the average person, a large rise in unemployment means a recession. By contrast, the economists` rule that a recession is defined by two consecutive quarters of falling GDP is silly.
However, it is not just the "two-quarter" rule that is flawed; GDP figures themselves can be misleading. The first problem is that they are subject to large revisions.
These are good reasons not to place too much weight on GDP in trying to spot recessions or when comparing slowdowns across economies.
This suggests that it makes more sense to define a recession as a period when growth falls significantly below its potential rate.
But even if this is a better definition of recession, potential growth rates are devilishly hard to measure and revisions to GDP statistics are still a problem. One solution is to pay much more attention to unemployment numbers, which, though not perfect, are generally not subject to revision and are more timely. A rise in unemployment is a good signal that growth has fallen below potential. Better still, it matches the definition of recession that ordinary people use.
As the old joke goes: when your neighbour loses his job, it is called an economic slowdown. When you lose your job, it is a recession. But when an economist loses his job, it becomes a depression. Economists who ignore the recent rise in unemployment deserve to lose their jobs.
http://www.economist.com/finance/economics...ory_id=12207987
Keith
An article from the Economist Magazine. Excerpts
THERE has been a nasty outbreak of R-worditis. Newspapers are full of stories about which of the big economies will be first to dip into recession as a result of the credit crunch. The answer depends largely on what you mean by "recession". Most economists assume that it implies a fall in real GDP. But this has created a lot of confusion: the standard definition of recession needs rethinking.
To the average person, a large rise in unemployment means a recession. By contrast, the economists` rule that a recession is defined by two consecutive quarters of falling GDP is silly.
However, it is not just the "two-quarter" rule that is flawed; GDP figures themselves can be misleading. The first problem is that they are subject to large revisions.
These are good reasons not to place too much weight on GDP in trying to spot recessions or when comparing slowdowns across economies.
This suggests that it makes more sense to define a recession as a period when growth falls significantly below its potential rate.
But even if this is a better definition of recession, potential growth rates are devilishly hard to measure and revisions to GDP statistics are still a problem. One solution is to pay much more attention to unemployment numbers, which, though not perfect, are generally not subject to revision and are more timely. A rise in unemployment is a good signal that growth has fallen below potential. Better still, it matches the definition of recession that ordinary people use.
As the old joke goes: when your neighbour loses his job, it is called an economic slowdown. When you lose your job, it is a recession. But when an economist loses his job, it becomes a depression. Economists who ignore the recent rise in unemployment deserve to lose their jobs.
http://www.economist.com/finance/economics...ory_id=12207987
Keith