Neoclassical Business Cycles

According to Prescott the reason for business cycles is due to technology shocks which manifest itself as changes in the TFP productivity term (or Solow residual) A. Summers criticises this explanation believing that Prescott doesn’t provide evidence for where these technology shocks come to. Furthermore he cites Berndt who shows that the oil shock crisis – recessionary periods in the 1970s for both the US and the UK – had little effect on labour productivity which would cast doubt on Prescott’s story. Summers also points out that US GNP declined by 50% between 1929 and 1933, and questions whether it is really plausible that such an output shock could be caused by a productivity shock which lead to inter-temporal substitution on such a scale, as Prescott’s model would predict.

Measuring Inequality

Inequality is the difference between the incomes of the rich and the poor and there are a number of different measures to see how inequality has been changing over time and between countries. National accounts do not provide any data on how income, consumption or wealth is distributed across households [OECD] instead they provide overall income for the country, and dividing this by the population gives us the average income of the nation. Instead we need to use household survey data to give us a measure of inequality. Such surveys are not consistent across countries and therefore make international comparisons of inequality difficult. To overcome these issues, and allow more precise measures of international inequality, we might consider aggregating the national accounts data with the survey data. Unfortunately, this is a very difficult task, and may cause more issues than it solves. One such issue is that in survey data, households who own their home when asked their income may not include an imputed value of their rent, but this is done when we construct the national accounts. Deaton believes that this factor alone is responsible for explaining a large majority in the difference between national income as given by the national accounts versus the household surveys.