Question

1. How would you define short-run fluctuation or ‘detrended output’. Provide the formula.

Answer 1

The busiest cycle literature studies deviations of output from a trend . Many Economic variables fluctuate from year to year . Main example of such fluctuations can be seen in the case of production. For example, Prices of inputs and output always vary.This is an example of short run fluctuations.

Short run A fluctuations are also sometimes referred to as detrended output. A detrend involves removing the Effects of accumulating data sets from a trend to show only the absolute change in values and to allow potential cyclical pattens to be identified.

In an economy, short run fluctuations can be viewed as the fluctuations in in an economy that result a change in the output level. This can be expressed with the help of the following formula.

D = |Y - Y*|/ ( Y+Y*)/2 * 100

D= detrended output

Y = actual GDP

Y* = potential GDP.

Thus, it's clear that detrendedoutput is the percentage difference between actual GDP and potential GDP.