A note on time periods in macroeconomics.
A survey of some principles and intermediate-level textbooks suggests that no such standard definitions of time horizons exist within macroeconomics, and the corresponding treatments of aggregate supply are also quite diverse. Perhaps the most common distinction between time periods is based on price flexibility. Indeed, Gwartney, Stroup, Sobel and Macpherson [Economics: Private and Public Choice, 2006], Hall and Papell [Macroeconomics: Economic Growth, Fluctuations, and Policy, 2005], Mankiw [Macroeconomics, 2003], McConnell and Brue [Economics: Principles, Problems, and Policies, 2005], O'Sullivan and Sheffrin [Economics: Principles and Tools, 2006], and Samuelson and Nordhaus [Economics, 2005] all define the short-run as that time period in which some prices are fixed while the long-run is specified as a time period sufficient enough that all prices are variable. Blanchard [Macroeconomics, 2006], Gordon [Macroeconomics, 2003], and Williamson [Macroeconomics, 2005], however, distinguish between the short-run and long-run based on calendar time, and Froyen [Macroeconomics: Theories and Policies, 2005] provides alternative conceptions of the two time horizons.
With respect to aggregate supply, there appears to be universal agreement that the long-run aggregate supply curve is vertical at the full-employment level of real gross domestic product. On the other hand, while Hall and Papell depict the short-run aggregate supply curve only or always as horizontal, Blanchard, Gwartney et al., McConnell and Brue, O'Sullivan and Sheffrin, Samuelson and Nordhaus, and Williamson show it as positively sloped. Lastly, Froyen, Gordon, and Mankiw present the short-run aggregate supply curve as both horizontal and positively sloped.
The purpose of this note is to suggest an approach which may provide some standardization of time periods for macroeconomics. More specifically, we propose and define four distinct time periods for macroeconomics: The extreme short-run, the short-run, the long-run, and the extreme long-run. The behavior of aggregate supply is linked to the different time horizons.
To begin, we assume or consider five parameters on the economy's supply side: The quantity of labor, the quantity of capital, the quality of these factors of production, or technology, the prices of these factors, and commodity prices or the general price level. The different time periods may then be treated as a progressive and systematic relaxing of restrictive assumptions with respect to these parameters. For example, we define the extreme short-run as that period of time in which the only supply parameter that can be changed is the quantity of labor, i.e, the quantity of capital, technology, factor prices, and the price level are all constant. This scenario yields Keynes' horizontal aggregate supply function for which the elasticity is undefined and changes in aggregate demand cause changes only in real gross domestic product.
Continuing along this line, we define the short-run as that time period for which the general price level is also variable along with the quantity of labor but the quantity of capital, technology, and factor prices remain fixed. These assumptions result in the familiar positively sloped aggregate supply curve. The elasticity of aggregate supply in this time period is between zero and infinity and changes in aggregate demand affect both the price level and real gross domestic product.
The long-run in our approach is defined as a period of time in which now factor prices also vary, along with the quantity of labor and the general price level, while the capital stock and technology remain fixed. This situation gives the Classical version of aggregate supply as vertical at the full-employment level of real gross domestic product. The elasticity of aggregate supply is zero in the long-run and changes in aggregate demand affect only the price level.
The final time period to consider is the extreme long-run. Over this horizon, the quantity of capital and technology also change in addition to the quantity of labor and commodity and factor prices. These additional changes of course shift the vertical long-run aggregate supply.
While the analysis and definitions of time periods are remarkably the same in microeconomics, they are quite disparate in macroeconomics. This note has attempted to provide some basis for a consistent treatment of time periods in macroeconomics. Our definitions of four distinct time periods are based on which of the five considered aggregate supply parameters are constant and which are variable. (JEL E00)
BEN L. KYER * AND GARY E. MAGGS **
* Francis Marion University and ** St. John Fisher College--U.S.A.
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|Author:||Kyer, Ben L.; Maggs, Gary E.|
|Publication:||Atlantic Economic Journal|
|Date:||Jun 1, 2006|
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