Page 684 - The Principle of Economics

704 PART TWELVE
SHORT-RUN ECONOMIC FLUCTUATIONS
together, such as the recessions of 1980 and 1982. Sometimes the economy goes many years without a recession.
FACT 2: MOST MACROECONOMIC QUANTITIES FLUCTUATE TOGETHER
Real GDP is the variable that is most commonly used to monitor short-run changes in the economy because it is the most comprehensive measure of economic activ- ity. Real GDP measures the value of all final goods and services produced within a given period of time. It also measures the total income (adjusted for inflation) of everyone in the economy.
It turns out, however, that for monitoring short-run fluctuations, it does not really matter which measure of economic activity one looks at. Most macroeco- nomic variables that measure some type of income, spending, or production fluc- tuate closely together. When real GDP falls in a recession, so do personal income, corporate profits, consumer spending, investment spending, industrial production, retail sales, home sales, auto sales, and so on. Because recessions are economy-wide phenomena, they show up in many sources of macroeconomic data.
Although many macroeconomic variables fluctuate together, they fluctuate by different amounts. In particular, as panel (b) of Figure 31-1 shows, investment spending varies greatly over the business cycle. Even though investment averages about one-seventh of GDP, declines in investment account for about two-thirds of the declines in GDP during recessions. In other words, when economic conditions deteriorate, much of the decline is attributable to reductions in spending on new factories, housing, and inventories.
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