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Business Cycle Facts

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Title: Business Cycle Facts


1
Business Cycle Facts
2
Real Output of the U.S. economy
3
Introduction
  • Since the Industrial Revolution, the economies of
    the US, like many other countries, have grown
    tremendously.
  • This long-term economic expansion has been
    periodically interrupted by temporary declines in
    economic activities and then followed by
    recovery.

4
Introduction
Long-run Economic Growth
Aggregate Economic Activities
Business Cycles
Time
5
Introduction
  • The observed changes in aggregate economic
    activity can be decomposed into two parts
  • Long-run economic growth the changes in economic
    performance over a long period of time, say
    between 1870 and 2007.
  • Business cycles fluctuations in economic
    activities about the long-run trend.

6
What is a business cycle?
7
What is a business cycle ?
  • Lucas defines the business cycle as the recurrent
    fluctuations of output about trend and the
    co-movements among other aggregate time series.
  • Other, important, aggregate time series include
    employment, aggregate investment, inflation rate
    etc.

8
Recessions
  • The period of time during which aggregate
    economic activity falls below trend is a
    contraction or recession.
  • If the recession is particularly severe, it
    becomes a depression.
  • During a recession, many sectors of the economy
    experience declining sales and production, and
    workers are laid off or forced to work only
    part-time.

9
Expansions
  • After reaching the low point of the contraction
    (the trough), aggregate economic activity begins
    to increase.
  • The period of time during which aggregate
    economic activity grows above trend is an
    expansion or a boom.
  • The high point of the expansion is called a peak.
  • A complete cycle is measured from peak to peak or
    trough to trough.

10
Key business cycle facts
  • (which any successful theory is supposed to
    explain)

11
Persistent deviations from trend in GDP High
correlation between hours worked and GDP.
Source Prescotts Nobel lecture
12
Consumption is relatively smooth while investment
is more volatile than output (deviations in both
variables are positively correlated with output
deviations)
13
Business cycles are recurrent, not predictable,
and asymmetric
  • they do not occur at regular, predictable
    intervals of time (in fact no one knows for sure
    when they will happen)
  • they do not last for a fixed or predetermined
    length of time (once a cycle begins no one knows
    for sure when it will end).
  • Business cycles are often asymmetric the
    contraction period is short and sudden, the
    expansion period is long and slow.

14
Cyclical Behavior of Economic Variables
  • An economic variable that moves in the same
    direction as real GDP is called procyclical.
  • An economic variable that moves in the opposite
    direction to real GDP is called countercyclical.

15
Procyclical Variable
Real GDP
Procyclical variable
Time
16
Countercyclical Variable
Real GDP
Countercyclical variable
Time
17
Cyclical Behavior of Economic Variables
  • An economic variable is a leading variable if it
    tends to move in advance of real GDP.
  • This means the peaks and troughs in a leading
    variable occur before the corresponding peaks and
    troughs in real GDP.
  • Economic observers are interested in economic
    variables that consistently lead the business
    cycle because they use such variables to forecast
    the future course of the economy (of course
    consistent relations can suddenly break down!)

18
Leading Variable
Real GDP
Leading variable
Time
19
Business Cycle Facts (1)
Variable Direction Timing
Consumption Procyclical Coincident
Business Fixed Investment Procyclical Coincident
Residential Investment Procyclical Leading
20
Business Cycle Facts (2)
Variable Direction Timing
Employment Procyclical Coincident
Unemployment Countercyclical
Inflation Procyclical Lagging
Stock Prices Procyclical Leading
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