Business Cycle Measurement - Southampton · Introduction Comovement Business Cycle Facts...

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




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




Figure 3.1Ideal Business Cycles




Figure 3.2Percentage Deviations from Trend in Real GDP




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



Business Cycle Facts

CyclicalityLeading/Lagging RelationshipVariability

Outline








Figure 3.3Time Series Plots of x and y





Figure 3.4Scatter Plots of x and y





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





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





Figure 3.5Imports and GDP





Figure 3.6Scatter Plot of Imports and GDP





Outline








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





Figure 3.7Leading and Lagging Variables





Figure 3.8GDP and Index of Leading Indicators





Outline








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




The Components of GDP: C and INominal Variables: P and MLabour Market Variables: E, RW and LP

Outline








Figure 3.9Consumption and GDP





Figure 3.10Investment and GDP





Outline








Figure 3.11Scatter Plot of Price Level and GDP





Figure 3.12Price Level and GDP





Figure 3.13Money Supply and GDP





Outline








Figure 3.14Employment and GDP





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





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


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Business Cycle Measurement - Southampton · Introduction Comovement Business Cycle Facts...

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