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August 15, 2018 

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J CURVE: An interesting relationship that exists between the exchange rate for a nation's currency and its balance of trade. In principle, the drop in a nation's exchange rate, or price of currency, makes the currency less expensive to "buy." With "cheaper" currency the price of domestic production is less and the price of foreign stuff is more, causing an increase in exports to other countries and drop in imports coming in from foreign producers. The economy thus moves in the direction away from a trade deficit and toward a trade surplus. However, the first few months after a drop in the exchange rate the balance of trade goes in the other direction, with any existing trade deficit increasing or any trade surplus shrinking. This occurs because the quantities imported and exported don't change in the short run, but the prices do. Because more is paid for the same amount of imported goods and receive less for the same amount of exports, total spending on imports increases, total revenue received from exports declines, and the movement is in the trade deficit direction. Once those quantities start adjusting in the long run, then we see a movement in the direction of a trade surplus.

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LONG-RUN TREND:

The pattern of potential real gross domestic product of an economy based on full employment of available resources. The long-run trend is commonly represented as a positively-sloped line in a diagram depicting business-cycle phases. This slope captures the economy's expansion in its production possibilities resulting from increases in the quantity and quality of resources.
The long-run trend is a positively-sloped line on a diagram that plots the movement of actual real gross domestic product over time. It is primarily used to identify unemployment and inflation problems generated by the business-cycle instability. If actual real gross domestic product is below the long-run trend, then the economy is not living up to its full employment potential and the economy has in a contraction and unemployment. If actual real gross domestic product is above the long-run trend due to an expansion, then the economy is temporarily overshooting its full employment potential, and inflation is likely to occur.

Long Run Growth
Business Cycle
The diagram displayed in this exhibit can be used to illustrate the macroeconomy's long-run trend. The red line represents the value of real gross domestic product (real GDP) over a period of several months. Clearly real GDP rises, then falls, then rises, then falls. This is the instability, the ups and downs, that are a fundamental part of business cycles.

To reveal the long-run trend of real GDP, or potential real GDP, click the [Long-Run Trend] button. This blue line represents the amount of real GDP that the economy can produce if all resources are fully employed, resulting in potential real GDP. It has a positive slope because the economy's production capabilities increase over time due to increases in the quantity and quality of resources. Historically, this long-run trend represents approximately a 3 percent annual growth of production capabilities and potential real GDP.

Clearly actual real GDP does not follow this long-run trend of potential real GDP. During some periods actual real GDP is greater than potential real GDP and in other periods actual real GDP is less than potential real GDP, indicated by the red line lying above or below the blue line. During some periods actual real GDP is growing faster than potential real GDP, in other periods actual real GDP is growing slower than potential real GDP, indicated by the red line having a steeper or flatter slope than the blue line. And in some cases actual real GDP declines even though potential real GDP continues to expand.

The fact that actual real GDP does not coincide with the long-run trend of potential real GDP is the essence of business cycles and instability of the macroeconomy.

<= LONG-RUN TOTAL COSTLOSS MINIMIZATION RULE =>


Recommended Citation:

LONG-RUN TREND, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: August 15, 2018].


Check Out These Related Terms...

     | business cycles | business cycle phases | expansion | contraction | peak | trough | recession | recovery | potential real gross domestic product |


Or For A Little Background...

     | full employment | production possibilities | production possibilities frontier | full employment, production possibilities |


And For Further Study...

     | business cycle indicators | investment business cycles | political business cycles | demand-driven business cycles | supply-driven business cycles | stabilization policies | unemployment | inflation | National Bureau of Economic Research | Conference Board, The | circular flow | long-run aggregate supply | long-run aggregate market |


Related Websites (Will Open in New Window)...

     | The Conference Board | National Bureau of Economic Research | Bureau of Economic Analysis |


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