Chapter 3

Business

Cycle

Measurement

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Chapter 3 Topics

• Regularities in GDP fluctuations.

• Comovement

• Behavior of Key Macroeconomic Variables.

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Regularities in GDP Fluctuations

• Business Cycles are fluctuations about trend in real GDP.

• The turning points in the deviations of real GDP from trend are peaks and troughs.

• Persistent positive deviations from trend are booms and persistent negative deviations from trend are recessions.

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Figure 3.1Idealized Business Cycles

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Deviations From Trend in Real GDP are Irregular

• The fluctuations in GDP about trend are quite choppy.

• There is no regularity in the amplitude of fluctuations in real GDP about trend.

• There is no regularity in the frequency of fluctuations in real GDP about trend.

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Figure 3.2Percentage Deviations from Trend in Real GDP

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Figure 3.3Time Series Plots of x and y

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Figure 3.4Correlations Between Variables y and x

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Correlation with Real GDP

• If the deviations from trend in a macroeconomic variable are positively (negatively) correlated with the deviations from trend in real GDP, then that variable is procyclical (countercyclical).

• If a macroeconomic variable is neither procyclical nor countercyclical, it is acyclical.

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Figure 3.5Imports and GDP

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Figure 3.6Scatter Plot of Imports and GDP

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Figure 3.7Leading and Lagging Variables

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Figure 3.8Percentage Deviations in Real GDP and Housing Starts

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Behavior of Key Macroeconomic Variables

• Components of GDP: consumption and investment.

• Nominal variables: price level and money supply.

• Labor market variables: employment, real wage, average labor productivity.

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Figure 3.9Percentage Deviations from Trend in Real Consumption and Real GDP

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Figure 3.10Percentage Deviations from Trend in Real Investment and Real GDP

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Figure 3.11Scatter Plot for the Percentage Deviations from Trend in the Price Level (the Implicit GDP Price Deflator) and Real GDP

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Figure 3.12Price Level and GDP

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Figure 3.13Percentage Deviations from Trend in the Money Supply and Real GDP

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Figure 3.14Percentage Deviations from Trend in Employment and Real GDP

Figure 3.15Jobless Recoveries

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Figure 3.16Percentage Deviations from Trend in Average Labor Productivity and Real GDP

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Figure 3.16Seasonally Adjusted and Unadjusted Money Supply

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Table 3.1Correlation Coefficients and Variability of Percentage Deviations from Trend

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Table 3.2Summary of Business Cycle Facts