Macro Foundations · advanced
What moves on the Business Cycle Phases diagram
Weaker productivity growth lowers the trend growth rate of potential outputpotential outputThe output an economy can sustain with normal use of its resources, where it returns once prices fully adjust., flattening the long-run path rather than opening a cyclical output gapoutput gapThe distance between actual output and potential output; positive gaps overheat, negative gaps mean slack..
Most shocks move the wave around the line. This one moves the line itself.
Business investment stalls for a decade and the pace of technological diffusion slows.
Trend growth falls, so the whole path tilts flatter.
This is the difference examiners look for: a recession is a gap below the trend, a productivity slowdown is a worse trend. The second one never gets made up.
Examiners ask this as: productivity slowdown, trend growth falls, secular stagnation, lower potential, weak investment.
Other scenarios on Business Cycle Phases