Business Cycle

Measurement
IU Main Campus

A. Z. Warsi
Intermediate Macroeconomic Theory
02/19/15

Regularities in GDP Fluctuations

Business Cycles:
Fluctuations about
trend in real GDP.
Peak (Trough): A
relatively large positive
(negative) deviation
from trend.
Peaks and troughs are
referred to as turning
points.

02/19/15

Regularities in GDP Fluctuations

Amplitude: The
maximum deviation from
trend.
Frequency: The number
of peaks in real GDP that
occur per year.

02/19/15

Observations from the U.S. Data

Consider the
percentage deviations
from trend in real
GDP over the period
1947 - 2006.
3 main observations:
Persistency
Irregularities
Comovement

02/19/15

Observations from the U.S. Data

Persistency: the
deviations from trend
are persistent in the
sense that when real
GDP is above (below)
trend, it tends to stay
above (below) trend.
This is important for
making economic
forecast over the short
run.

02/19/15

Observations from the U.S. Data

Irregularities:
Irregularities in the
amplitude and
frequency of
fluctuations in real
GDP about trend.
These imply that
forecasting is difficult
for longer term.

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Observations from the U.S. Data

Macroeconomic variables usually fluctuate together in
patterns that exhibit strong regularities: Comovement
3 ways of describing comovement relative to real GDP:
Procyclical, countercyclical, acyclical
Leading, lagging, coincident
Variability relative to GDP

02/19/15

Observations from the U.S. Data

Procyclical variable: If
its deviations from trend
are positively correlated
with the deviations from
trend in real GDP.
Examples:
Real consumption, real
investment, real imports,
money supply,
employment and real
wage.

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Observations from the U.S. Data

Countercyclical variable:
If its deviations from trend
are negatively correlated
with the deviations from
trend in real GDP.
Example:
Price level

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Observations from the U.S. Data

Acyclical variable: If it
is neither procyclical or
countercyclical.

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Observations from the U.S. Data

Degree of correlation between two variable x and y is
measured by the correlation coefficient ,
Cov
(x , y)

var(x ) var(y)
takes on values between 1 (perfectly negatively
correlated) and 1 (perfectly positively correlated).

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Leading and Lagging

Leading variable: Its
peaks and troughs tend
to precede those of real
GDP.
This kind of variable
tends to aid in
predicting the future
path of real GDP.
Example: Money supply

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Leading and Lagging

Lagging variable: Its
peaks and troughs tend
to lag before those of
real GDP.
Contrary, real GDP helps
to predict the future
path of such a variable.

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Leading and Lagging

Coincident variable:
One that is neither
leads nor lags real GDP.
Examples:
Real consumption
Real investment
Price level

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Variability relative to GDP

Variables that are more volatile than real GDP:
Real investment, real imports

Variables that are less volatile than real GDP:

Real consumption, price level, money supply and
employment

Cyclical variability is measured by the standard

deviation of the percentage deviations from trend.

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