ECON3102-005 Chapter 3: Business Cycle MeasurementBusiness Cycles are uctuations about trend in real...

ECON3102-005Chapter 3: Business Cycle

Measurement

Neha Bairoliya

Spring 2014

Regularities in GDP Fluctuations

Business Cycles are fluctuations about trend in real GDP.

• The turning points in thedeviations of real GDP fromtrend are peaks and troughs.

• Persistent positive deviationsfrom trend are booms andpersistent negative deviationsfrom trend are recessions.

• The amplitude of the businesscycle is the maximum deviationfrom trend.

• The frequency of the businesscycle is the number of peaks inRGDP that occur per year.

Irregularities in GDP Fluctuations

• The fluctuations in GDP abouttrend are quite choppy.

• There is no regularity in theamplitude of fluctuations in realGDP about trend.

• There is no regularity in thefrequency of fluctuations in realGDP about trend.

So, is there any hope of anticipating businesscycles?

• While short-term forecasting isrelatively easy (sometimes)

• long-term forecasting is nearlyimpossible.

• This is why we say thatbusiness cycles areunpredictable.

Other Macro Indicators

• Macroeconomic variables often fluctuate together in patterns thatexhibit strong regularities. These patterns are known ascomovements.

• To identify comovements we often rely in observation of thevariables graphs.

Generally, graphs of macroeconomic variables come in two differentflavors:

• Scatter plots

• Time-series plots

Other Macro Indicators

• Macroeconomic variables often fluctuate together in patterns thatexhibit strong regularities. These patterns are known ascomovements.

• To identify comovements we often rely in observation of thevariables graphs.

Generally, graphs of macroeconomic variables come in two differentflavors:

• Scatter plots

• Time-series plots

Time-series Plots

• Example: variables X and Y

• Variable values are on the Y-axis. Time is on the X-axis.

Time-series Plots

• Variable values are on the Y-axis. Time is on the X-axis.

Scatter Plots

• One variable is on the X-axis, and the other on the Y-axis.

Scatter Plots

• One variable is on the X-axis, and the other on the Y-axis.

Correlation With Real GDP

We are mostly interested in how individual economic variables comovewith GDP.

• An economic variable is procyclical if its deviations from trend arepositively correlated with deviations from trend in RGDP.

• An economic variable is countercyclical if its deviations from trendare negatively correlated with deviations from trend in RGDP.

• Variables which are neither procyclical nor countercyclical are calledacyclical.

Correlation With Real GDP (cont’d)

• If a macro variable helps in predicting the future path of RGDP, wesay call it a leading variable.

• If RGDP helps in predicting the future path of the variable, it is alagging variable.

• Variables which neither lead nor lag RGDP are called coincidentvariables.

Another Measure

Volatility: a measure of cyclical variability is the standard deviation of thepercentage deviations from trend.

Example: Imports and RGDP (scatter plot)

Example: Imports and RGDP (time-seriesplot)

• Imports are procyclical and more volatile than RGDP.

Example: Imports and RGDP (time-seriesplot)

• Imports are procyclical and more volatile than RGDP.

Model and Behavior of Key MacroeconomicVariables

If we are to construct a macroeconomic model which helps us understandbusiness cycles and the economy, itd better be the case that it is able toreplicate the regularities and comovements that we observe in RGDP andits components!

• Components of GDP: consumption and investment.

• Nominal variables: price level and money supply.

• Labor market variables: employment, real wage, average laborproductivity.

Consumption and GDP

• Procyclical orcountercyclical?

• Procyclical

• Lead or lag?

• Coincident

• More volatilethan GDP?

• No

Consumption and GDP

• Procyclical

• Lead or lag?

• Coincident

• No

Consumption and GDP

• Procyclical

• Lead or lag?

• Coincident

• No

Consumption and GDP

• Procyclical

• Lead or lag?

• Coincident

• No

Investment and GDP

• Procyclical

• Lead or lag?

• Coincident

• Yes

Investment and GDP

• Procyclical

• Lead or lag?

• Coincident

• Yes

Investment and GDP

• Procyclical

• Lead or lag?

• Coincident

• Yes

Investment and GDP

• Procyclical

• Lead or lag?

• Coincident

• Yes

Price and GDP

• Countercyclical

• Lead or lag?

• Coincident

• No

Price and GDP

• Countercyclical

• Lead or lag?

• Coincident

• No

Price and GDP

• Countercyclical

• Lead or lag?

• Coincident

• No

Price and GDP

• Countercyclical

• Lead or lag?

• Coincident

• No

Money Supply and GDP

• Procyclical

• Lead or lag?

• Leading

• No

• Procyclical

• Lead or lag?

• Leading

• No

• Procyclical

• Lead or lag?

• Leading

• No

• Procyclical

• Lead or lag?

• Leading

• No

Employment and GDP

• Procyclical

• Lead or lag?

• Lagging

• No

Employment and GDP

• Procyclical

• Lead or lag?

• Lagging

• No

Employment and GDP

• Procyclical

• Lead or lag?

• Lagging

• No

Employment and GDP

• Procyclical

• Lead or lag?

• Lagging

• No

Average Labor Productivity and GDP

• Procyclical

• Lead or lag?

• Coincident

• No

• Procyclical

• Lead or lag?

• Coincident

• No

• Procyclical

• Lead or lag?

• Coincident

• No

• Procyclical

• Lead or lag?

• Coincident

• No

Summary

Our models should be able to replicate the following table.

ECON3102-005 Chapter 3: Business Cycle MeasurementBusiness Cycles are uctuations about trend in real...

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