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2. Measurement of Potential Output

2. Measurement of Potential Output. Alternative definitions of PO (vgl. SVR, JG 2007/08, TZ 693). real GDP at full use of capacities. real GDP at normal use of capacities. normal use of capacities => calculated from trend in recent cycles. normal use of capacites

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2. Measurement of Potential Output

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  1. 2. Measurement of Potential Output Alternative definitionsof PO (vgl. SVR, JG 2007/08, TZ 693) real GDP atfulluseofcapacities real GDP atnormaluseofcapacities normal useofcapacities => calculatedfromtrend in recentcycles normal useofcapacites => definedas non-inflationary U. van Suntum, KuB 1 U van Suntum, Vorlesung KuB 1

  2. Capacityutilization (Auslastungsgrad) CU = GDP/PO Output-gap (Outputlücke): OG = (GDP – PO)/PO U. van Suntum, KuB 2 U van Suntum, Vorlesung KuB 2

  3. Measurement of Potential Output • Long term: • (allowingforinvestments in both • human and real capitalandfor • technicalprogress) • productionfunctionapproaches • (Okun, Bundesbank, OECD, SVR) • Short term: • (atconstantlevelandqualityof • factorsofproduction) • statistical filter-approaches • (Hodrick/Prescott 1997, • Baxter/King 1999 u.a.) U. van Suntum, KuB 3 U van Suntum, Vorlesung KuB 3

  4. U. van Suntum, KuB 4 U van Suntum, Vorlesung KuB 4

  5. U. van Suntum, KuB 5 U van Suntum, Vorlesung KuB 5

  6. Potential Output by Okuns`s Law (A.M. Okun, 1962) • Based on empiricalobservations in USA 1947 - 1960 • Decline in unemployment rate RU by 1% => increaseof GDP by 3% • Natural rate ofunemployment (NRU) = 4% • Critique (i): todaycapitalisthemorescarcefactor • Critique (ii): ruleofthumb, dependent on time andregion U. van Suntum, KuB 6 U van Suntum, Vorlesung KuB 6

  7. 2. Potential Output by Peak-to Peak (L. Klein 1964) PO „Peaks“ GDPreal Zeit • Critique (i): trendmay not bestable • Critique (ii): not everypeakimpliesfullcapacityutilization • Critique (iii): trendof GDP ortrendof GDP-growth? U. van Suntum, KuB 7 U van Suntum, Vorlesung KuB 7

  8. PO by peak to peak BIP real U. van Suntum, KuB 8 U van Suntum, Vorlesung KuB 8

  9. 3. Potential Output by shifting the trend Maximum tangent point trend PO GDPreal • Critique (i): trendmaybeunstable • Critique (ii): trendof GDP ortrendof GDP growth? U. van Suntum, KuB 9 U van Suntum, Vorlesung KuB 9

  10. 4. Potential Output by production function (Bundesbank, OECD) • Critique (i): capital stock andNpotmust beestimated • Critique (ii): Cobb-Douglas productionfunctionappropriate? U. van Suntum, KuB 10 U van Suntum, Vorlesung KuB 10

  11. 5. Potential Output by non-parametric estimation (Bundesbank) Trend estimation wage share • mainadvantage: absolute valuesof K und Npotneed not beknown • Critique (i): absolute valueof PO cannotbedirectlycalculated U. van Suntum, KuB 11 U van Suntum, Vorlesung KuB 11

  12. Exercise (I): Calculate PO by Okun´s law for quarter 7 U. van Suntum, KuB U van Suntum, Vorlesung KuB 12

  13. Exercise (II): Calculate PO by peak to peak for quarter 14 U. van Suntum, KuB U van Suntum, Vorlesung KuB 13

  14. Exercise (III): Calculate PO by trend shifting for quarter 14 U. van Suntum, KuB U van Suntum, Vorlesung KuB 14

  15. Exercise (IV): Calculate PO by Cobb Douglas production function for quarter14 Assume: U. van Suntum, KuB U van Suntum, Vorlesung KuB 15

  16. Learning goals / Questions • Which definitions of Potential Output do we know? • How are potential output, capacity utilization, and output gap related to each other? • How can we estimate/calculate Potential Output? • What are the main strengths and weaknesses of the various approaches? U. van Suntum, KuB 16 U van Suntum, Vorlesung KuB 16

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