businesscyclesppt

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Procyclical Variable
Real GDP
Procyclical variable
Time
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Countercyclical Variable
Real GDP
Countercyclical variable
Time
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Cyclical Behavior of Economic Variables
Business Cycle Facts
Real Output of the U.S. economy
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Introduction

Since the Industrial Revolution, the economies of the US, like many other countries, have grown tremendously.
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.

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Key business cycle facts
(which any successful theory is supposed to explain)
Persistent deviations from trend in GDP; High correlation between hours worked and GDP.
This long-term economic expansion has been periodically interrupted by temporary declines in economic activities and then followed by recovery.
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Introduction
Source: Prescott’s Nobel lecture
Consumption is relatively smooth while investment is more volatile than output (deviations in both variables are positively correlated with output deviations)


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.
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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.
Aggregate Economic Activities
Long-run Economic Growth
Business Cycles
Time
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Introduction

The observed changes in aggregate economic activity can be decomposed into two parts:
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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.

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…!)

Other, important, “aggregate time series” include employment, aggregate investment, inflation rate etc.
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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.
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Leading Variable
Real GDP
Leading variable
Time
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Business Cycle Facts (1)
Variable Consumption
Business Fixed Investment Residential Investment
Direction Procyclical Procyclical Procyclical
Stock Prices
Procyclical
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Leading
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What is a business cycle?
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.
Timing Coincident Coincident Leading
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Business Cycle Facts (2)
Variable Employment Unemployment Inflation Direction Procyclical Countercyclical Procyclical Timing Coincident —— Lagging