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Chapter 3
Business Cycle
Measurement
Business Cycles
• What are they? Fluctuations about the trend
in real GDP.
• Features of Business Cycles
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Peaks
Troughs
Turning Points
Amplitude: maximum deviation from trend
Frequency: # of peaks in real GDP that occur per
year
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Figure 3.1 Idealized Business Cycles
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Figure 3.2 Percentage Deviations from
Trend in Real GDP: 1947--2003
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Business Cycle Regularities
• Business Cycles are Persistent
• Deviations from Trend are Choppy
• Variability in Amplitude
• Variability in Frequency
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Co-movement
• Macro variables tend to fluctuate
together
• Can we measure this co-movement?
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Correlation
• Time Series Comparisons
• Scatter Plots
• Correlation Coefficient
 X ,Y
E[( X  EX )(Y  EY )]

 X Y
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Figure 3.3 Time Series Plots of
x and y
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Figure 3.4 Correlations Between
Variables y and x
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Cyclical Properties
• Procyclical: the deviations from trend
are positively correlated with the
deviations from trend in real GDP.
• Countercyclical: the deviations from
trend are negatively correlated with the
deviations from trend in real GDP.
• Acyclical:
 X,GDP  0
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Figure 3.5 Imports and GDP
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Figure 3.6 Scatter Plot of Imports
and GDP
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Imports are procyclical
 IM,GDP  0.67
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Timing
• Leading
• Lagging
• Coincident
• The Index of Leading Indicators: we can
use it to predict future real GDP
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Figure 3.7 Leading and Lagging
Variables
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Figure 3.8 Percentage Deviations from Trend in Real
GDP (colored line) and the Index of Leading Economic
Indicators (black line) for 1959–2003
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Volatility
• The patterns of variability of macro
variables are an important part of
business cycle behavior.
• We use standard deviation to measure
it.
 X  E[( X  EX ) ]
2
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Figure 3.9 Percentage Deviations from
Trend in Real Consumption (black line)
and Real GDP (colored line)
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Figure 3.10 Percentage Deviations from
Trend in Real Investment (black line)and
Real GDP (colored line)
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Figure 3.11 Scatter Plot for the Percentage
Deviations from Trend in the Price Level (the
Implicit GDP Price Deflator) and Real GDP
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Figure 3.12 Price Level and GDP
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Figure 3.13 Percentage Deviations from Trend
in the Money Supply (black line) and Real GDP
(colored line) for the Period 1959–2003
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Figure 3.14 Percentage Deviations from
Trend in Employment (black line) and
Real GDP (colored line)
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Figure 3.15 Percentage Deviations from Trend
in Average Labor Productivity (black line) and
Real GDP (colored line) for 1948–2003
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Table 3.1 Correlation Coefficients and
Variability of Percentage Deviations from
Trend
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Table 3.2 Summary of Business
Cycle Facts
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