LONG-RUN AND SHORT-RUN MACROECONOMIC
PHENOMENA
The distinction between long-run and short0run macroeconomics is first and
fundamentally a distinction between the phenomena we want to understand. This leads to a
distinction between the fundamental characterictics of the models we use, and the policies we
analyse. Below we will motivate these statements and explain the nature of the difference
between long-run and short-run macroeconomic models.
Let us start by looking at some data. In this picture we hace chosen to focus on two
countries, the USA and Denmark, since these two nations can be seem as polar cases: the USA
is a large and relatively closed economy with a fairly small public secror (by European
standards), whereas Denmark is small and relatively open economy with a large public sector.
We want to ilustrate that, despite these differences, some important qualitative features of the
data are shared betweeen the two economies. Similar figures drawn for countries like the UK,
Sweden, the Netherlands, and for practically any developed market economy would show the
same qualitative features.
Natural algorithms of the annual real GDPs of the USA and Denmark are drawn up for the
period from 1873 to recently, with the value in 1873 indexed to 100 for both countries. These
figures shows the average annual rates of unemployement for the two countries during the past
and pressent century. In both figures, the actual data are represented by the most solidly drawn
zig-zagged curves.
The figures also include grey curves which are much more smooth. These are meant to
express the trends of the relevant series.
In any event, the figures suggest that one wat to interpret the movements of each of the
series is to view them as being made up of two components: a trend componennt representing
the overall evolution and captured by the smooth curves, and a cyclical component
representing the year-to-year fluctuations and captured by the shifting vertical devations
between the actual data curve and the trend curve.
