Introduction to Macroeconomics

1
Introduction to Macroeconomics

• Chapter 7
• Business Cycles

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Chapter 7. Business Cycles

• 1. Characteristics of Business Cycles
• 2. Business Cycle Relationships
• 3. Forecasting Business Cycles

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1. Characteristics of Business Cycles

• Recurrent, systematic fluctuations in the level
  of business activity
• - real GDP growth rate
• - inflation
• - unemployment

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1. Characteristics of Business Cycles
Systematic Fluctuations
Peak
Trough
Peak
Contraction
Expansion
(Recession)
Real GDP
Unemployment Rate (percent)
Inflation Rate (percent)
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1. Characteristics of Business Cycles Real
GDP
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1. Characteristics of Business Cycles
Unemployment
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1. Characteristics of Business Cycles
Inflation
P
T
P
T
P
T
P
T
P
T
P
T
Expansion
Sources Bureau of Labor Statistics
National Bureau of Economic Reasearch
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1. Characteristics of Business Cycles
Components of GDP
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2. Business Cycle Relationships

• Okuns Law changes in GDP and unemployment
• Phillips Curve unemployment and inflation

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2. Business Cycle Relationships Okuns Law

• Output fluctuates more than unemployment over the
  business cycle
• 1 decline in growth rate of real GDP leads to
  1/2 of workers becoming unemployed

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2. Business Cycle Relationships Okuns Law
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2. Business Cycle Relationships Phillips
Curve, 1950s and 1960s
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2. Business Cycle Relationships Phillips
Curve, 1970s
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3. Forecasting Business Cycles Direction of
Movement

• Procyclical - with the cycle. Increases during
  expansions and declines during contractions
• Countercyclical - goes against the cycle
• Acyclical - no observable relation to the cycle

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3. Forecasting Business Cycles Timing

• Coincident - matches the cycle. Peaks and troughs
  occur at roughly the same time.
• Lagging - peaks and troughs follow a few months
  later.
• Leading - peaks and troughs occur before those of
  the cycle.

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3. Forecasting Business Cycles Index of
Leading Economic Indicators
P
T
P
T
P
T
P
T
P
T
P
T
Sources The Conference Board www.tcb-indicators.
org/ NBER www.nber.org