42 PART • Introduction: Markets and Prices 20 Growth Rate (annual percentage) 15 10 GDP Ϫ5 Equipment Investment Ϫ10 Ϫ15 Ϫ20 1950 1955 1960 1965 1970 1975 1980 Year 1985 1990 1995 2000 2005 2010 F IGURE 2.14 GDP AND INVESTMENT IN DURABLE EQUIPMENT Annual growth rates are compared for GDP and investment in durable equipment Because the short-run GDP elasticity of demand is larger than the long-run elasticity for long-lived capital equipment, changes in investment in equipment magnify changes in GDP Thus capital goods industries are considered “cyclical.” to magnify cyclical changes in gross domestic product (GDP) and national income Figures 2.14 and 2.15 illustrate this principle Figure 2.14 plots two variables over time: the annual real (inflation-adjusted) rate of growth of GDP and the annual real rate of growth of investment in producers’ durable equipment (i.e., machinery and other equipment purchased by firms) Note that although the durable equipment series follows the same pattern as the GDP series, the changes in GDP are magnified For example, in 1961–1966 GDP grew by at least percent each year Purchases of durable equipment also grew, but by much more (over 10 percent in 1963–1966) Equipment investment likewise grew much more quickly than GDP during 1993–1998 On the other hand, during the recessions of 1974–1975, 1982, 1991, 2001, and 2008, equipment purchases fell by much more than GDP Figure 2.15 also shows the real rate of growth of GDP, along with the annual real rates of growth of spending by consumers on durable goods (automobiles, appliances, etc.) and nondurable goods (food, fuel, clothing, etc.) Note that while both consumption series follow GDP, only the durable goods series tends to magnify changes in GDP Changes in consumption of nondurables are roughly the same as changes in GDP, but changes in consumption of durables are usually several times larger This is why companies