Week 10 Flashcards
What is business cycle?
Type of fluctuation found in aggregate economic activity
How long is a business cycle
Varies from 1-10 years or 12 years
What is Classical Cycle?
Peaks and troughs in the plot of level. Time series represents level of the economic activity
What is a Growth Cycle?
Fluctuations in the growth rate of the economic activity relative to the trend rate of growth
Steps to analysing the Business Cycles?
- Identify cycle history and current cyclical circumstances
- Identify the links between the economic cycle and target time series
- Project the economic activity & adjust forecasts to make the more accurate
What measure can you apply in Business Cycle Analysis?
GDP A - average of all GDP measures
What are the problems with GDP?
- Data collection time lag
- Does NOT measure current economic activity
What are leading indicators?
They tease out the turning points of economic cycles (find out the direction of the economy)
- Leading indicators go through similar fluctuations, but they occur BEFORE the target time series. THEREFORE we can adjust model to leading indicators
What problems do leading indicators overcome?
- cycle non-generalisability
- GDP publication time lag
What is the criteria for leading indictors?
- Significant economic variable
- Statistically adequate
- Regularly available and not subject to constant revisions
- Consistent (leading, coincident & future relationship)
What are leading, lagging, coincident indicators
- Leading = looks ahead
- Lagging = Looks behind
- Coincident = reflects present - turning points will be approximately the same as the business cycle (CB Coincident Index)
What does it mean if leading indicator is <100?
Turning downwards
What does it mean if leading indicator is >100?
Turning upwards
What are Composite leading Indicator
A combination of multiple time series, Weighted average of all of them) = COMPOSITE INDEX
- less random fluctuations
- more suitable indicator
Because no measure can accurately measure changes in activity across all sectors
What are the three main composite leading indexes used in Australia?
- Westpac-Melbourne Institute (WMI)
- Conference Board (CB)
- OECD
What are micro level leading indicators?
Applied at organisational level:
1. Anticipatory Surveys
2. Pre sales/ orders
3. Social Media
4. Business Expectations & Performance
5. Consumer Sentiment
Does generalisation work with cycles?
No, because they are INDIVIDUAL - generalisation will not work.
Why do turning point play an important role?
You must understand TURNING POINTS as they may create changes in the level of the time series
What is Composite Forecasting?
Combine two unbiased forecasting models to improve forecast accuracy.
In combining, we use weighted average (k term)
- the more different the models, the better efficiency gains
How can you choose k*?
- Naive (mean average method) - equal weighting in both models (K* = 0.5, for both)
- May not improve forecast - Performance Based - place more weight on better performing model (the one that has a lower MSE)
The Yc (Forecast for combined model) will be closer to what?
The model that had more weight
