[PEN-L:29542] Re: RE: Re: PK on current events

[Ben Day <day@xxxxxxxxxxxxxx>]

At 07:42 AM 8/17/2002 -0700, Devine, James wrote:
> Michael Pollack asks:
> How would one go about calculating this output gap from publicly
> available figures?
>
> the basic is to calculate potential real GDP. There are two steps here.
> First, add the trend in average labor productivity for the economy as a
> whole to the trend in the labor force. Or just calculate the trend in real
> GDP. (I would use some sort of polynomial approximation.) Then, in order
> to calculate the level of potential, choose a base year when you think the
> economy was at potential (1999?) and use that to figure out what the level
> of real GDP is along the trend line. Conservatives would choose a year
> when unemployment was high, so that we had above-potential production in
> 1999. Liberals would choose a year like 1999, so that the GDP gap is
> large, but it turns out that the GDP gap (potential minus actual real GDP)
> moves together no matter what year is chosen.
>
> Or you could use numbers from the Office of Management & Budget or the
> Congressional Budget Office.

Michael and James - if either of you have Krugman's _Age of Diminished
Expectations_ lying around, you might check out pp. 60-61 where he
describes the "output gap" of the recession of the early 1980s, induced to
combat inflation. This is how's he's constructing the trend line:

"Figure 13 shows the picture, which is about as clear as anything in
economics. It shows two lines.  One line represents 'trend' output: a
projection of what the U.S. economy would have produced during the 1980s if
it had continued to grow steadily at the same 2.4 percent rate at which it
grew from 1973 to 1979.  This trend line represents a rought estimate of
what the U.S. economy could have produced if it had been running at more or
less full capacity.  The other line shows the actual gross national
product, which fell sharply below the trend line from 1979 to 1982, and did
not get back close to the trend line until 1987. The gap between these two
lines - the difference between what the economy could have produced and
what it actually produced - represents a rough estimate of the cost of
America's war on inflation. This gap peaked at 10 percent of GNP in 1982
and averaged 3 percent over the seven years from 1980 to 1986..."

So if he's doing the same thing in his most recent article, I'd guess he's
just taking the growth average for the mid to late 90s and comparing it
with the actual growth for the last couple of years. (?)

-----Ben