Business Cycle Measurement Chapter 3 Topics in Macroeconomics 2 Economics Division University of Southampton February 2009 Chapter 3 1/31 Topics in Macroeconomics
Outline Regularities in GDP Fluctuations Regularities in GDP Fluctuations Summary Chapter 3 2/31 Topics in Macroeconomics
Regularities in GDP Fluctuations Business Cycles Business Cycles Fluctuations about trend in real gross domestic product These fluctuations are what is left over once we take the trend out of real GDP Business cycles are very difficult to predict But they are quite regular in terms of comovements Chapter 3 3/31 Topics in Macroeconomics
Figure 3.1 Ideal Business Cycles Regularities in GDP Fluctuations Chapter 3 4/31 Topics in Macroeconomics
Regularities in GDP Fluctuations Figure 3.2 Percentage Deviations from Trend in Real GDP Chapter 3 5/31 Topics in Macroeconomics
Regularities 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 6/31 Topics in Macroeconomics
Outline Regularities in GDP Fluctuations Summary Chapter 3 7/31 Topics in Macroeconomics
Figure 3.3 Time Series Plots of x and y Chapter 3 8/31 Topics in Macroeconomics
Figure 3.4 Scatter Plots of x and y Chapter 3 9/31 Topics in Macroeconomics
An economic variable is said to be: Procyclical if its deviations from trend are positively correlated with the deviations from trend in real GDP - the two series move in the same direction Countercyclical if its deviations from trend are negatively correlated with the deviations from trend in real GDP - the two series move in opposite directions Acyclical if it is neither procyclical or countercyclical Chapter 3 10/31 Topics in Macroeconomics
Correlation Coefficient A measure of the degree of correlation between two variables is the correlation coefficient. This coefficient takes values between -1 and 1. If the correlation coefficient is 1, then series are perfectly positively correlated If the correlation coefficient is -1, then series are perfectly negatively correlated If the correlation coefficient is 0, then the series are uncorrelated Chapter 3 11/31 Topics in Macroeconomics
Figure 3.5 Imports and GDP Chapter 3 12/31 Topics in Macroeconomics
Figure 3.6 Scatter Plot of Imports and GDP Chapter 3 13/31 Topics in Macroeconomics
Outline Regularities in GDP Fluctuations Summary Chapter 3 14/31 Topics in Macroeconomics
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 15/31 Topics in Macroeconomics
Figure 3.7 Leading and Lagging Variables Chapter 3 16/31 Topics in Macroeconomics
Figure 3.8 GDP and Index of Leading Indicators Chapter 3 17/31 Topics in Macroeconomics
Outline Regularities in GDP Fluctuations Summary Chapter 3 18/31 Topics in Macroeconomics
of Economic Variables There are key regularities in terms of the variability of economic variables over the business cycle A measure of cyclical variability is the standard deviation of the percentage deviations from trend We usually measure the variability of a variable relative to the variability of GDP For example, Figure 3.5 shows that imports are more volatile than GDP Chapter 3 19/31 Topics in Macroeconomics
Outline Summary Regularities in GDP Fluctuations Summary Chapter 3 20/31 Topics in Macroeconomics
Figure 3.9 Consumption and GDP Summary Chapter 3 21/31 Topics in Macroeconomics
Figure 3.10 Investment and GDP Summary Chapter 3 22/31 Topics in Macroeconomics
Outline Summary Regularities in GDP Fluctuations Summary Chapter 3 23/31 Topics in Macroeconomics
Summary Figure 3.11 Scatter Plot of Price Level and GDP Chapter 3 24/31 Topics in Macroeconomics
Figure 3.12 Price Level and GDP Summary Chapter 3 25/31 Topics in Macroeconomics
Figure 3.13 Money Supply and GDP Summary Chapter 3 26/31 Topics in Macroeconomics
Outline Summary Regularities in GDP Fluctuations Summary Chapter 3 27/31 Topics in Macroeconomics
Figure 3.14 Employment and GDP Summary Chapter 3 28/31 Topics in Macroeconomics
Outline Summary Regularities in GDP Fluctuations Summary Chapter 3 29/31 Topics in Macroeconomics
Summary Correlation Coefficients and of Percentage Deviations from Trend Correlation Coefficient (with GDP) Standard Deviation (% of S.D. of GDP) Consumption 0.82 85.0 Investment 0.80 564.8 Price Level -0.18 101.0 Money Supply 0.36 124.4 Employment 0.84 90.8 Chapter 3 30/31 Topics in Macroeconomics
Summary Summary of Lead/Lag Relative to GDP Consumption Procyclical Coincident Smaller Investment Procyclical Coincident Larger Price Level Countercyclical Coincident Larger Money Supply Procyclical Leading Larger Employment Procyclical Lagging Smaller Real Wage Procyclical? Chapter 3 31/31 Topics in Macroeconomics