Download Business Cycle Measurement

What is a Business Cycle?
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Business Cycle Measurement
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Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Slide 1
Regularities/ Irregularities
Fluctuations around the trend component in real
GDP
largest negative deviations (recessions) troughs
and largest positive deviations (booms/expansions)
peaks from trend component. Î turning points
Amplitude and frequency
Persistency of BCs
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Slide 2
Figure 3-1 Stylized Business Cycles
Regularities: comovement of real GDP with
other macroeconomic variables
Irregularities: turning points; very difficult to
predict
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Slide 3
Figure 3-2 Percentage Deviations from Trend in
Real GDP from 1947 to 1999
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
What do you see?
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BCs are quite persistent:
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BCs are choppy
BCs are different in amplitude (size of peaks
and troughs vary substantially)
BC frequencies are irregular (the length of
time between peaks and troughs vary
substantially)
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Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
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Slide 4
makes short term forecasting rather easy
Make long term forecasting difficult
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
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Comovements
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Figure 3-3 Time Series Plots of x and y
Some macroeconomic variables fluctuate
together
Regularities
Stylized facts
Slide 7
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Some useful concepts
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Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Covariance and correlation
Covariance
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Cov[ x, y ] = σ xy =
∑ [( x − µ )( y − µ
i
i
x
i
y
)]
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n −1
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correlation
co r[ x, y ] = ρ
=
σ
σ
Sign of covariance will indicate the direction
of covariation of X and Y
However its magnitude depends on the scales
of measurement
Correlation coefficient is very useful to
account for this magnitude..
xy
xy
x
σ
y
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Slide 9
Figure 3-4 Correlations Between Variables
y and x
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
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Some concepts
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Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
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Some important macroeconomic terms:
A variable is said to be procyclical if its
deviations from its trends component are
positively correlated with the real GDP
countercyclical, acyclical
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Slide 12
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Procyclical: Imports and GDP
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Procyclical: Scatter Plot of Imports and GDP
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Leading vs. Lagging Variables
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Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
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Figure 3-7 Leading and Lagging Variables
If a variable helps to predict the future real
GDP Î leading variable
If the real GDP helps to predict the future
value of a macro variable Î lagging variable
Coincident variable
Leading indicators: weighted average of
macroeconomic variables that are useful to
predict future real GDP
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Slide 15
Percentage Deviations from Trend in Real GDP and the Index of
Leading Economic Indicators for the Period 1959-1999
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
cyclical variability
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Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
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Standard deviation of the percentage deviation
from trend as a measure of cyclical variability
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
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Components of Real GDP I: Percentage Deviations
from Trend in Real Consumption and Real GDP
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Slide 19
Nominal Variables: Scatter Plot for the Percentage Deviations
from Trend in the Price Level and Real GDP
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Slide 21
Nominal Variables: Percentage Deviations from Trend in the
Money Supply (black line) and Real GDP (colored line) for the
Period 1947-1999
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
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Components of Real GDP II: Percentage Deviations from Trend
in Real Investment (black line) and Real GDP (colored line)
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Slide 20
Price Level and GDP
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Slide 22
Labor Market Variables: Percentage Deviations from
Trend in Employment (black line) and Real GDP
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
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Summary of Comovements
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
Summary of Comovements II
Slide 25
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
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Sum up
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Measurement, and generating stylized facts on
business cycle is important
Keywords: Procyclical, countercyclical,
acyclical, correlation, comovements
Copyright © 2002 Pearson Education, Inc and Dr Yunus Aksoy.
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