Week 10

Question 1

What is business cycle?

Answer 1

Type of fluctuation found in aggregate economic activity

Question 2

How long is a business cycle

Answer 2

Varies from 1-10 years or 12 years

Question 3

What is Classical Cycle?

Answer 3

Peaks and troughs in the plot of level. Time series represents level of the economic activity

Question 4

What is a Growth Cycle?

Answer 4

Fluctuations in the growth rate of the economic activity relative to the trend rate of growth

Question 5

Steps to analysing the Business Cycles?

Answer 5

1. Identify cycle history and current cyclical circumstances
2. Identify the links between the economic cycle and target time series
3. Project the economic activity & adjust forecasts to make the more accurate

Question 6

What measure can you apply in Business Cycle Analysis?

Answer 6

GDP A - average of all GDP measures

Question 7

What are the problems with GDP?

Answer 7

1. Data collection time lag
2. Does NOT measure current economic activity

Question 8

What are leading indicators?

Answer 8

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

Question 9

What problems do leading indicators overcome?

Answer 9

• cycle non-generalisability
• GDP publication time lag

Question 10

What is the criteria for leading indictors?

Answer 10

1. Significant economic variable
2. Statistically adequate
3. Regularly available and not subject to constant revisions
4. Consistent (leading, coincident & future relationship)

Question 11

What are leading, lagging, coincident indicators

Answer 11

• Leading = looks ahead
• Lagging = Looks behind
• Coincident = reflects present - turning points will be approximately the same as the business cycle (CB Coincident Index)

Question 12

What does it mean if leading indicator is <100?

Answer 12

Turning downwards

Question 13

What does it mean if leading indicator is >100?

Answer 13

Turning upwards

Question 14

What are Composite leading Indicator

Answer 14

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

Question 15

What are the three main composite leading indexes used in Australia?

Answer 15

1. Westpac-Melbourne Institute (WMI)
2. Conference Board (CB)
3. OECD

Question 16

What are micro level leading indicators?

Answer 16

Applied at organisational level:
1. Anticipatory Surveys
2. Pre sales/ orders
3. Social Media
4. Business Expectations & Performance
5. Consumer Sentiment

Question 17

Does generalisation work with cycles?

Answer 17

No, because they are INDIVIDUAL - generalisation will not work.

Question 18

Why do turning point play an important role?

Answer 18

You must understand TURNING POINTS as they may create changes in the level of the time series

Question 19

What is Composite Forecasting?

Answer 19

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

Question 20

How can you choose k*?

Answer 20

1. Naive (mean average method) - equal weighting in both models (K* = 0.5, for both)
   - May not improve forecast
2. Performance Based - place more weight on better performing model (the one that has a lower MSE)

Question 21

The Yc (Forecast for combined model) will be closer to what?

Answer 21

The model that had more weight