I was up late last night figuring out an equation to calculate the center of the business cycle. The new equation is opening up my eyes to many new insights.
There is a brute way to calculate the center of the business cycle. First we find the productive capacity of the economy. There are two equations for this.
Productive capacity = Real GDP/T
Productive capacity = Effective demand/effective labor share
T = TFUR, multiply labor utilization by capital utilization
Then to figure the center of the business cycle, there is this equation.
Center of business cycle = Real GDP - Biz cycle amplitude constant * (c/e - 1)
c = capicity utilization... e = effective labor share
Then to find the % of productive capacity for the center of the business cycle...
% of productive capacity = center of business cycle/productive capacity
But I wanted to find a more elegant equation that opened a deeper understanding of the center of the business cycle, which is important because it is a foundation of how the economy grows.
Here is the equation that I found...
Center of business cycle as % of productive capacity =
T * (1 + g * (1 - c/e)) ..... or ..... T * (1 + g - g * c/e)
g is a variable between 0 and 1 that changes over time. I will explore g in the rest of the post because it is the mystery of the equation.
The variable g has declined over the years, showing that capital utilization is now a preferred way to raise real GDP. The video explains that. (link to video if not seen well.)
But you can see in the video that the center of the business cycle has been declining over the years as a % of productive capacity. The cause of that is a drop in labor share (effective demand). However, business generates growth through capital utilization now, even though capital utilization is suppressed by low demand.
Here is a graph for current data...
Anyway, these are some preliminary insights to work on.