Business Cycle Measurement

Question 1

What is the Business Cycle? What are some properties of the business cycle

Answer 1

• The business cycle is fluctuatuons around the trend of real GDP
• The business cycle shows troughs and peaks in the percentage deviation from the trend
• Some important properties include amplitude and frequency (waves in physics)
• These often have little-to-no regularity

Question 1

Why is the business cycle important to different parties?

Answer 1

• In developed economies, nations are more willing to accept slow growth for economic stability
• In developing economies, nations have trade-offs between social stability and economic stability
• Governments in general must observe the business cycle to ensure booms/recessions do not create long-term damage
• Individuals have decisions on housing and human/financial/physical capital

Question 2

What is Comovements? Name the examples of economic comovement

Answer 2

• Comovement illustrates the cyclicality of variables
• Procyclical: +ve correlation with %d of GDP
• Countercyclical: -ve correlation with %d of GDP
• Acyclical: 0 correlation with %d of GDP

Question 3

How can Comovement be presented and used?

Answer 3

• Comovement can be presented via time series plots or scatter plots
• Can be contemporaneous (statistic [PMCC]) or Leading/Lagging/Coincident ([Variance Coefficient])

Question 4

What are Variabilities? What are the types of variabilities?

Answer 4

• Variabilities illustrate the volatility of variables (can use standard deviation as a measure)
• Univariate: Focus on each variable as opposed to the relationship
• Commensurable: All variables are expressed in the %d from trends

Question 5

Give two examples of how variabilities are used in economics

Answer 5

• Consumption Smoothing: [V(C) < V(GDP)]
• Speculative Over-shooting:
  [V(I) > V(GDP)]

Question 6

What does the Classical Dichotomy state about the relationship between price and RGDP?

Answer 6

• In the Long Run, Price and RGDP have no relation
• This is because the ‘Real’ side of the economy is determined by technology and real variables
• The ‘Nominal’ side of the economy is determined by money and nominal variables

Question 7

How do other variables impact analysis of the business cycle?

Answer 7

• Focus on stylised facts of real variables (RGDP, C, I) during business cycles up to now
• This can be turned into nominal variables (P)

Question 8

How do labour market variables impact analysis of the business cycle?

Answer 8

• Focus on stylised facts of output market variables (GDP, P) during the business cycles up to now
• Looking especially at employment and wages

Question 9

What are stylised facts? Give the comovement and variability of each component

Answer 9

• Stylised facts: Quantitative measures that illustrate an economic theory
• Consumption: 0.77 (CC) and 77% (%σ of GDP)
• Investment: 0.80 (CC) and 301% (%σ of GDP)
• Employment: 0.78 (CC) and 65% (%σ of GDP)
• Wage/Avr. Labour Product: 0.77 (CC) and 63% (%σ of GDP)

Question 10

Using stylised facts, provide cyclicality, indicator timing and relative variation of consumption, investment, employment, real wage, ALP

Answer 10

• Consumption: Procyclical, Coincident Indicator, Small variation
• Investment: Procyclical, Coincident Indicator, Large variation
• Employment: Procyclical, Lagging Indicator, Small variation
• Real Wage: Procyclical, Unsure variation or indicator timing
• Average Labour Productivity: Procyclical, Coincident Indicator, Small variation