Economic crysis (part 3)

Lets go a bit back into the history and talk about the Monte Carlo hypothesis:
Fisher (1925) argued that business cycles could not be predicted because they resembled cycles observed by gamblers in an honest casino in that the periodicity, rhythm, or pattern of the past is of no help in predicting the future. Slutsky (1937) also believed that business cycles had the form of a chance function.

The Monte Carlo (MC) hypothesis, as formulated by McCulloch (1975), is that the probability of a reversal occurring in a given month is a constant which is independent of the length of time elapsed since the last turning point. The alternative (business cycle) hypothesis is that the probability of a reversal depends on the length of time since the last turning point.
The implication of the MC hypothesis is that random shocks are sufficiently powerful to provide the dominant source of energy to an econometric model which would probably display heavy dampening in their absence. The simulations with large scale econometric models in the early 1970s showed that random shocks are normally not sufficient to overcome the heavy dampening typical in these models and to produce a realistic cycle. Instead serially correlated shocks are required.12 If shocks were in fact serially correlated the gambler (forecaster) could exploit knowledge of the error process in forming predictions and we would move away from the honest MC casino. The need to use autocorrelated shocks could alternatively indicate that the propagation model is dynamically misspecified.

McCulloch (1975) notes that if the MC hypothesis is true then the probability of a reversal in a given month is independent of the last turning point. Using as data NBER reference cycle turning points, McCulloch tests to see if the probability of termination is equal for ‘young’ and old’ expansions (contractions). Burns and Mitchell (1946) did not record specific cycle11 expansions and contractions not lasting at least fifteen months, measured from peak to peak or trough to trough. The probability of reversal is therefore less for very young expansions (contractions) than for median or old expansions (contractions), and McCulloch (1975) disregards months in which the probability of reversal has been reduced.

Economic crysis (part 2)

The term crisis is used to a high variety of economic, financial, health and sycological problems. But we'll talk about economic crisis. Sometimes it`s refereed to a situation in which the economy of a country experiences some kind of troubles brought on by a financial crisis. An economy facing an economic crisis will experience a falling GDP, a drying up of liquidity and rising/falling prices due to a inflation/deflation which in the worst cases can turn into galloping inflation. An economic crisis can take the form of a recession or a depression sometimes can be also called real economic crisis.

There are two types of crisis:

-crisis of underproduction (also called deficit) situation when supply isnt enough to provide enough goods and services to demand. Usually occurs due to of not detecting the aggregate demand and the inability of the free market aggregate production planning. As a result, for a particular manufacturer usually knows what and how much goods and services market demands. The first major crises of this kind appeared in England in the XVII century.

-crisis of overproduction; situation when demand is too low with the development of the industrial economy of the market crises of overproduction become cyclical and today represents one of the phases of the economic cycle.

Some scientists believe that the first in the history of the world crisis has erupted in the Roman Empire in 88 BC. Other scientists call the first economic crisis the crisis in 1825 in England, which is alsopartially affected the economy of the United States and France, because it was the first crisis that has gripped several industries

Economic crisis (part 1)

This is very easy to understand film about what has actually happened, but it has lots of false info and misunderstandings. This will be a small preview for my next topic: economic crisis

Consumer Price Index

The Consumer Price Index (CPI) gives data on changes in the prices paid by urban consumers for a representative basket of goods and services. The CPI-basket contains basically all the goods and service consumed in a country - food, gas, medicine, haircuts, transportation, house rent and so on. The composition of the CPI basket is determined by the value of what is consumed in the country - the larger the value of total consumption of a good or service, the larger the weight in the basket. For example, if we spend twice as much on apples as on pears, apples will have twice the weight in the basket. The exact details of the composition of the basket and how the CPI is calculated are complicated and vary somewhat between countries. Here you can see  CPI for Germany after the reunification starting at January 1991. This data has 2005 as the reference year. Tins means that the CPI is constructed in such a way that CPI is exactly equal to 100 on average during 2005.

Problems with CPI

To illustrate the problems involved in calculating the CPI we consider phones. If you measure the average price of phones at two points in tune, say one year apart, you may find that the average price has not changed.

However, this is not the whole story since the products on the market will have changed. Typically, the products at the later measurement are more advanced than the products at the first measurement. If you were to compare prices of phones with the same performance, you would probably find that prices have fallen. Without adjusting for changes in performance and quality, you will usually overestimate the rise in the price index.