Business cycle measurement

Question 1

Regularities in GDP fluctuations

Answer 1

Business Cycles are persistent 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.

Amplitude is the maximum deviation from trend

Question 2

Deviations From Trend in Real GDP are Irregular

Answer 2

• 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.

Question 3

Comovement

Answer 3

• Macroeconomic variables fluctuate together in patterns that exhibit strong regularities
• These patterns in fluctuations are referred to as comovement
• We measure macroeconomic variables as time series
• Positive correlation when variable x is high at the same time as variable y and vice versa
• Negative correlation when variable x is high when variable y is low and vice versa

Question 4

Scatter plot

Answer 4

• Variable x on x-axis and Variable y on y-axix
• If two time series are perfectly positively (negatively) correlated, then a scatter plot will be a positively (negatively) sloped straight line
• Otherwise, correlation is determined by the slope of a straight line that is best fit to the data

Question 5

Correlation with Real GDP

Answer 5

• 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.

Question 6

Imports and real GDP

Answer 6

• Procyclical

Question 7

Correlation coefficient

Answer 7

• Measure of the degree of correlation between two variables
• Takes on values between -1 and 1
• (1) = perfectly positively correlated
• (-1) = perfectly negatively correlated
• (0) uncorrelated

Question 8

Leading variables

Answer 8

• A macroeconomic variable that tends to aid in predicting the future path of real GDP

Question 9

Lagging variables

Answer 9

• If real GDP helps to predict the future path of that particular macroeconomic variable

Question 10

Coincident variable

Answer 10

• A macroeconomic variable which neither leads nor lags real GDP

Question 11

Measure of cyclical variability

Answer 11

• Standard deviation of the percentage deviations from trend

Question 12

The components of GDP

Answer 12

• Consumption = Highly positively correlated (procyclical), coincident variable. Less volatile/variable than GDP
• Investment = Positively correlated (procyclical), coincident variable. More volatile/variable than GDP

Question 13

The price level and GDP

Answer 13

• The correlation of the price level with real GDP is close to zero.
• This was not always so, as the price level tended to be negatively correlated with real GDP early in the post-World War II period.
• However, over some periods of time in history, the price level has been procyclical.

Question 14

The Inflation Rate and GDP

Answer 14

• Phillips curve – Illustrates a negative relationship between the rate of change in money wages and the unemployment rate
• If we take the unemployment rate to be a measure of aggregate economic activity, then the Phillips-curve captures a positive relationship between the rate of change in a money price and the level of aggregate activity
• A positive correlation in the data of in the inflation rate with real GDP would be evidence of a Phillips curve relation.

Question 15

Percentage Deviations from Trend in Employment and Real GDP

Answer 15

• Employment is a procyclical, lagging variable, but is less variable/volatile than real GDP

Question 16

Percentage Deviations from Trend in Average Labor Productivity and Real GDP

Answer 16

• The behavior of average labor productivity is sometimes important in distinguishing among theories of the business cycle. In the data, average labor productivity is procyclical.

Question 17

Seasonal adjustment

Answer 17

• Statisticians take account of the regular seasonal fluctuations in the data and try to take them out in a consistent way – Observe historical seasonal patterns and take out the extra amount we tend to observe during a particular time period
• Sometimes there are issues with seasonal adjustment – a problem is that seasonal adjustment is purely statistical and takes no account of economic factors.