Macroeconomics
Sixth Edition, Global Edition
Chapter 3
Business Cycle
Measurement
Copyright © 2018 Pearson Education, Ltd. All rights reserved.
Learning Objectives, Part I
3.1 State the key regularities in GDP fluctuations.
3.2 Explain the importance of comovement among
economic time series.
3.3 State the key properties of comovements among the
components of GDP.
Learning Objectives, Part II
3.4 Discuss why comovements between the price level
and real GDP and between the inflation rate and real
GDP are important to our understanding of business
cycles.
3.5 State the key comovements among labor market
variables and real GDP.
Learning Objectives, Part III
3.6 Explain the importance of seasonal adjustment.
3.7 State the key business cycle facts.
Regularities in GDP Fluctuations
• Business Cycles are fluctuations about trend in real
GDP.
• The turning points in the deviations of real GDP from
trend are peaks and troughs.
• Persistent positive deviations from trend are booms and
persistent negative deviations from trend are
recessions.
Know how to draw this graph with at
Figure 3.1 least two peaks & troughs
Idealized Business Cycles
• A complete business cycle is one trough to
on trough or one peak to one peak
• Amplitudes don’t have to be the same
• Eg “with the aid of a graph show the
idealised business cycle with all of its
components”
o Define what the idealised business
cycle is, draw the graph, describe the
trough/peaks and amplitude
Deviations From Trend in Real GDP are
Irregular
• The fluctuations in GDP about trend are quite choppy.
• There is no regularity in the amplitude of fluctuations
in real GDP about trend.
• There is no regularity in the frequency of fluctuations
in real GDP about trend.
• Some cycles may be short/long
• All attributes make it difficult to forecast a business
cycle
Figure 3.2
Percentage Deviations from Trend in
Real GDP
Figure 3.3
Time Series Plots of x and y
Will be asked to calculate correlation coefficients, and interpret them
I.E. They trend in the same direction
most of the time, not all of the time, but
it is positive for most of the time
Figure 3.4
Correlations Between Variables y and x
Correlation with Real GDP
• If the deviations from trend in a macroeconomic
variable are positively (negatively) correlated with the
deviations from trend in real GDP, then that variable is
procyclical (countercyclical).
• If a macroeconomic variable is neither procyclical nor
countercyclical, it is acyclical.
• One of the variables will always be GDP (variable y)
Figure 3.5 Imports and GDP
Procyclical: positive correlation
Figure 3.6 Scatter Plot of Imports and GDP
“explain the difference between a leading and
lagging variable and provide examples of both”
Figure 3.7 Leading and Lagging Variables
• Used in forecasting real GDP • The opposite, real GDP gives an indication for
• Housing statistics, and vehicle sales are leading the other good
variables
Figure 3.8 Percentage Deviations in Real
GDP and Housing Starts
Behaviour of Key Macroeconomic
Variables
• Components of GDP: consumption and investment.
• The price level and inflation.
• Labour market variables: employment, real wage,
average labour productivity.
Figure 3.9
Percentage Deviations from Trend in
Real Consumption and Real GDP
• Procyclical: highly correlated
• In terms of variability: some
periods of consumption
deviate a lot but some not as
much away from the trend
(less volatile as compared to
other variables)
Figure 3.10 Percentage Deviations from Trend
in Real Investment and Real GDP
• Procyclical
• With variability: much more
volatile than with
consumption. Higher
deviation from the trend
• Investments are much more
volatile
• Tricker to thus forecast with
investments (more volatile
due to the nature of
investments) as compared
with consumption
Figure 3.11 Percentage Deviations From
Trend in the Price Level and Real GDP
Figure 3.12 The Inflation Rate and GDP
Figure 3.13 Percentage Deviations from
Trend in Employment and Real GDP
Figure 3.14 Percentage Deviations from Trend in
Average Labour Productivity and Real GDP
Figure 3.15 • Just be aware of adjusted data
Seasonally Adjusted and Unadjusted
Unemployment Rate
Table 3.1
Correlation Coefficients and Variability
of Percentage Deviations from Trend
All procyclical Standard Deviation (% of
Blank cell Correlation Coefficient S.D. of GDP
Consumption 0.77 77
Investment 0.80 301
Employment 0.78 65
Average Labour
Productivity 0.77 63
Higher = more volatile
Where government expenditure fits in:
• Between consumtiion and investment
• Its less volatile than investment and more volatile than consumption
Reference to investment is capital investment not financial investment
Table 3.2 Summary of Business Cycle Facts
Variation Relative
Cyclicality Lead/Lag to GDP
Consumption Procyclical Coincident Smaller
Investment Procyclical Coincident Larger
Employment Procyclical Lagging Smaller
Real Wage Procyclical ? ?
Average Labour
Productivity Procyclical Coincident Smaller