Hysteresis and Trend GDP

National Income · Macro
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Actual GDP Pre-recession trend Pre-recession trend (continued) Post-recession trend
A deep recession can permanently lower the level of trend GDP (hysteresis). For example, long-term unemployment erodes workers' skills and firms cut investment, so productive capacity is lost. After the recession the economy grows at the same trend rate as before, but along a lower path, so the output between the two trend lines is lost for good.