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Note 3. Business Cycle

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7 views18 pages

Note 3. Business Cycle

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Pb H
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© © All Rights Reserved
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Chapter 3.

Business Cycle Measurement

Jun Hee Kwak

Sogang University
Macroeconomics 1

September 11, 2024

Sogang University Macroeconomics 1 September 11, 2024 1 / 18


Key Questions 1.
-
GDP
GDP

State the key regularities in GDP fluctuations.


- GDP

Explain the importance of comovements among economic time series.


2.
-

State the key properties of comovements among the components of


3. GDP
GDP. -
-
- GDP

Discuss why comovements between the price level and real GDP and
between the inflation rate and real GDP are important to our
- GDP
understanding of business cycles.
- GDP
GDP

State the key comovements among labor market variables and real
GDP. 5.- GDP GDP
GDP

- GDP GDP
- GDP
Explain the importance of seasonal adjustment.
6. 7.
- - GDP
GDP
State the key business cycle facts. -

Sogang University Macroeconomics 1 September 11, 2024 2 / 18


Regularities in GDP Fluctuations
Business Cycles: fluctuations about trend in real GDP

Peaks and troughs in the deviations from trend in real GDP are
referred to as turning points
▶ Peaks: a relatively large positive deviation from trend
▶ Troughs: a relatively large negative deviation from trend

Amplitude: the maximum deviation from trend

Frequency: the number of peaks in real GDP that occur per year

Boom: A series of positive deviations from trend culminating in a


peak

Recession: A series of negative deviations from trend culminating in a


trough

Sogang University Macroeconomics 1 September 11, 2024 3 / 18


Figure 1: Idealized Business Cycles

Sogang University Macroeconomics 1 September 11, 2024 4 / 18


Comovement
Comovement: Macroeconomic variables fluctuate together.

Macroeconomic variables are measured as time series.

Macroeconomists usually transform time series by removing trends.

Figure 2: Time Series Plots of x and y

Sogang University Macroeconomics 1 September 11, 2024 5 / 18


Comovement
We can also use a scatter plot as follows.

Figure 3: Time Series Plots of x and y

Sogang University Macroeconomics 1 September 11, 2024 6 / 18


Comovement

Correlation coefficient: a measure of the degree of correlation


between two variables
▶ The correlation coefficient takes on values between -1 and 1.
▶ If this value is 1, then two variables are perfectly positively
correlated.
▶ If this value is -1, then two variables are perfectly negatively
correlated.

Sogang University Macroeconomics 1 September 11, 2024 7 / 18


Leading and lagging relationships
Leading and lagging relationships:
▶ A leading variable tends to aid in predicting the future path of real
GDP.
▶ Real GDP helps to predict the future path of a particular
macroeconomic variable, which is a lagging variable.
▶ A coincident variable is one which neither leads nor lags real GDP.

Figure 4: Time Series Plots of x and y

Sogang University Macroeconomics 1 September 11, 2024 8 / 18


Cyclicality

Cyclicality:
▶ Procyclical: when an economic variable’s deviations from trend are
positively correlated with the deviations from trend in real GDP
▶ Countercyclical: when an economic variable’s deviations from trend
are negatively correlated with the deviations from trend in real GDP
▶ Acyclical: neither procyclical nor countercyclical

A measure of cyclical variability is the standard deviation of the


percentage deviations from trend.

Sogang University Macroeconomics 1 September 11, 2024 9 / 18


Housing Market and Business Cycle
Housing starts clearly lead real GDP.

Figure 5: Real GDP (colored line) and Housing Starts (black line)

Note: Percentage deviations in housing starts are divided by 10 so we can


see the comovement better.
Sogang University Macroeconomics 1 September 11, 2024 10 / 18
Consumption
Consumption is procyclical, coincident, and less variable than GDP.
GDP

Figure 6: Real Consumption (black line) and Real GDP (colored line)

Sogang University Macroeconomics 1 September 11, 2024 11 / 18


Investment

Investment is procyclical, coincident, and more variable than GDP.


GDP

Figure 7: Real Investment (black line) and Real GDP (colored line)

Sogang University Macroeconomics 1 September 11, 2024 12 / 18


Price Level
Phillips curve: A negative relationship between the rate of change in
money wages and the unemployment rate.
The figure shows that the correlation coefficient is -0.17. How would
you reconcile the figure with the Phillips curve?

Figure 8: Price Level (black line) and Real GDP (colored line)

Sogang University Macroeconomics 1 September 11, 2024 13 / 18


Inflation Rate
The correlation coefficient between inflation rate and Real GDP
(detrended) is 0.30, which conforms to a conventional Phillips curve
correlation.

Figure 9: Inflation Rate (black line) and Real GDP (colored line)

Sogang University Macroeconomics 1 September 11, 2024 14 / 18


Employment

Employment is procyclical, a lagging variable, and less variable than


real GDP.

Figure 10: Employment (black line) and Real GDP (colored line)

Sogang University Macroeconomics 1 September 11, 2024 15 / 18


Jobless Recoveries
A jobless recovery occurs when employment takes an abnormally
long time to return to trend after the trough in GDP occurs.
GDP

Figure 11: Jobless Recoveries

Sogang University Macroeconomics 1 September 11, 2024 16 / 18


Productivity
Average labor productivity can be measured as output per worker.
Average labor productivity is procyclical, coincident, and less variable
than real GDP. GDP

Figure 12: Average Labor Productivity (black line) and Real GDP (colored line)

Sogang University Macroeconomics 1 September 11, 2024 17 / 18


Seasonal Adjustment
Most data used in macroeconomic research is seasonally adjusted, as
there exists a predictable seasonal component.
▶ ex) GDP tends to be low during the summer months when workers are
on vacation.

Seasonal adjustment: Observe historical seasonal patterns and take


out the extra amount that we tend to see on average during a
particular week, month, or quarter, simply because of the time of year.

Figure 13: Seasonally Adjusted and Unadjusted Unemployment Rate

Sogang University Macroeconomics 1 September 11, 2024 18 / 18

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