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Business Cycle MeasurementChapter 3
Topics in Macroeconomics 2
Economics DivisionUniversity of Southampton
February 2010
Chapter 3 1/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle FactsRegularities in GDP Fluctuations
Outline
IntroductionRegularities in GDP Fluctuations
ComovementCyclicalityLeading/Lagging RelationshipVariability
Business Cycle FactsThe Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Chapter 3 2/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle FactsRegularities in GDP Fluctuations
Business Cycles
Business CyclesFluctuations about trend in real gross domestic product
◮ These fluctuations are what is left over once we take thetrend out of real GDP
◮ Business cycles are very difficult to predict◮ But they are quite regular in terms of comovements
Chapter 3 3/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle FactsRegularities in GDP Fluctuations
Figure 3.1Ideal Business Cycles
Chapter 3 4/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle FactsRegularities in GDP Fluctuations
Figure 3.2Percentage Deviations from Trend in Real GDP
Chapter 3 5/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle FactsRegularities in GDP Fluctuations
Regularities in GDP Fluctuations
Features of Business Cycles:◮ Deviations from trend in real GDP are persistent◮ The time series of deviations from trend in real GDP is
quite choppy◮ There is no regularity in the amplitude of fluctuations in
real GDP◮ There is no regularity in the frequency of fluctuations in
real GDP about trend
Chapter 3 6/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Outline
IntroductionRegularities in GDP Fluctuations
ComovementCyclicalityLeading/Lagging RelationshipVariability
Business Cycle FactsThe Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Chapter 3 7/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Figure 3.3Time Series Plots of x and y
Chapter 3 8/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Figure 3.4Scatter Plots of x and y
Chapter 3 9/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Cyclicality
An economic variable is said to be:◮ Procyclical if its deviations from trend are positively
correlated with the deviations from trend in real GDP - thetwo series move in the same direction
◮ Countercyclical if its deviations from trend are negativelycorrelated with the deviations from trend in real GDP - thetwo series move in opposite directions
◮ Acyclical if it is neither procyclical or countercyclical
Chapter 3 10/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Correlation Coefficient
A measure of the degree of correlation between two variables isthe correlation coefficient. This coefficient takes valuesbetween -1 and 1.
◮ If the correlation coefficient is 1, then series are perfectlypositively correlated
◮ If the correlation coefficient is -1, then series are perfectlynegatively correlated
◮ If the correlation coefficient is 0, then the series areuncorrelated
Chapter 3 11/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Figure 3.5Imports and GDP
Chapter 3 12/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Figure 3.6Scatter Plot of Imports and GDP
Chapter 3 13/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Outline
IntroductionRegularities in GDP Fluctuations
ComovementCyclicalityLeading/Lagging RelationshipVariability
Business Cycle FactsThe Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Chapter 3 14/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Leading and Lagging Variables
An economic variable is said to be:◮ A leading variable if it tends to aid in predicting the future
path of real GDP◮ A lagging variable, if real GDP helps predict the future path
of the variable◮ A coincident variable if it neither leads nor lags real GDP
Chapter 3 15/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Figure 3.7Leading and Lagging Variables
Chapter 3 16/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Figure 3.8GDP and Index of Leading Indicators
Chapter 3 17/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Outline
IntroductionRegularities in GDP Fluctuations
ComovementCyclicalityLeading/Lagging RelationshipVariability
Business Cycle FactsThe Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Chapter 3 18/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
CyclicalityLeading/Lagging RelationshipVariability
Variability of Economic Variables
◮ There are key regularities in terms of the variability ofeconomic variables over the business cycle
◮ A measure of cyclical variability is the standard deviation ofthe percentage deviations from trend
◮ We usually measure the variability of a variable relative tothe variability of GDP
◮ For example, Figure 3.5 shows that imports are more volatilethan GDP
Chapter 3 19/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
The Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Outline
IntroductionRegularities in GDP Fluctuations
ComovementCyclicalityLeading/Lagging RelationshipVariability
Business Cycle FactsThe Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Chapter 3 20/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
The Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Figure 3.9Consumption and GDP
Chapter 3 21/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
The Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Figure 3.10Investment and GDP
Chapter 3 22/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
The Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Outline
IntroductionRegularities in GDP Fluctuations
ComovementCyclicalityLeading/Lagging RelationshipVariability
Business Cycle FactsThe Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Chapter 3 23/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
The Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Figure 3.11Scatter Plot of Price Level and GDP
Chapter 3 24/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
The Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Figure 3.12Price Level and GDP
Chapter 3 25/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
The Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Figure 3.13Money Supply and GDP
Chapter 3 26/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
The Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Outline
IntroductionRegularities in GDP Fluctuations
ComovementCyclicalityLeading/Lagging RelationshipVariability
Business Cycle FactsThe Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Chapter 3 27/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
The Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Figure 3.14Employment and GDP
Chapter 3 28/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
The Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Correlation Coefficients and Variability of PercentageDeviations from Trend
Correlation Coefficient Standard Deviation(with GDP) (% of S.D. of GDP)
Consumption 0.82 85.0Investment 0.80 564.8Price Level -0.18 101.0Money Supply 0.36 124.4Employment 0.84 90.8Av. Labour Prod. 0.82 62.7
Chapter 3 29/30 Topics in Macroeconomics
IntroductionComovement
Business Cycle Facts
The Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP
Summary of Business Cycle Facts
Cyclicality Lead/Lag VariabilityRelative to GDP
Consumption Procyclical Coincident SmallerInvestment Procyclical Coincident LargerPrice Level Countercyclical Coincident LargerMoney Supply Procyclical Leading LargerEmployment Procyclical Lagging SmallerReal Wage Procyclical ? —Av. Labour Prod. Procyclical Coincident Smaller
Chapter 3 30/30 Topics in Macroeconomics