Chapter 3

Business
Cycle
Measurement

Copyright 2008 Pearson Addison-Wesley. All rights reserved.

Chapter 3 Topics
Regularities in GDP fluctuations.
Comovement
Behavior of Key Macroeconomic Variables

Copyright 2008 Pearson Addison-

3-2

Regularities in GDP
Fluctuations
Business Cycles are fluctuations about trend in
real GDP.
The turning points in the deviations of real GDP
from trend are peaks and troughs.
Persistent positive deviations from trend are
booms and persistent negative deviations from
trend are recessions.
Copyright 2008 Pearson Addison-

3-3

Figure 3.1 Idealized Business

Cycles

Copyright 2008 Pearson Addison-

3-4

Deviations From Trend in

Real GDP are Irregular
The fluctuations in GDP about trend are quite
choppy.
There is no regularity in the amplitude of
fluctuations in real GDP about trend.
There is no regularity in the frequency of
fluctuations in real GDP about trend.

Copyright 2008 Pearson Addison-

3-5

Figure 3.2 Percentage Deviations from

Trend in Real GDP from 19472006

Copyright 2008 Pearson Addison-

3-6

Figure 3.3 Time Series Plots

of x and y

Copyright 2008 Pearson Addison-

3-7

Figure 3.4 Correlations

Between Variables y and x

Copyright 2008 Pearson Addison-

3-8

Correlation With Real GDP

If the deviations from trend in a macroeconomic
variable are positively (negatively) correlated
with the deviations from trend in real GDP, then
that variable is procyclical (countercyclical).
If a macroeconomic variable is neither
procyclical nor countercyclical, it is acyclical.

Copyright 2008 Pearson Addison-

3-9

Figure 3.5 Imports and GDP

Copyright 2008 Pearson Addison-

3-10

Figure 3.6 Scatter Plot of

Imports and GDP

Copyright 2008 Pearson Addison-

3-11

Figure 3.7 Leading and

Lagging Variables

Copyright 2008 Pearson Addison-

3-12

Figure 3.8 Percentage Deviations from Trend in

Real GDP (colored line) and the Index of Leading
Economic Indicators (black line) for 19592006

Copyright 2008 Pearson Addison-

3-13

Behavior of Key
Macroeconomic Variables
Components of GDP: consumption and
investment.
Nominal variables: price level and money
supply.
Labor market variables: employment, real wage,
average labor productivity.

Copyright 2008 Pearson Addison-

3-14

Figure 3.9 Percentage Deviations from

Trend in Real Consumption (black line) and
Real GDP (colored line) 19472006

Copyright 2008 Pearson Addison-

3-15

Figure 3.10 Percentage Deviations from

Trend in Real Investment (black line) and
Real GDP (colored line)

Copyright 2008 Pearson Addison-

3-16

Figure 3.11 Scatter Plot for the Percentage

Deviations from Trend in the Price Level (the
Implicit GDP Price Deflator) and Real GDP

Copyright 2008 Pearson Addison-

3-17

Figure 3.12 Price Level and

GDP

Copyright 2008 Pearson Addison-

3-18

Figure 3.13 Percentage Deviations from Trend

in the Money Supply (black line) and Real GDP
(colored line) for the Period 19592006.

Copyright 2008 Pearson Addison-

3-19

Figure 3.14 Percentage Deviations from

Trend in Employment (black line) and
Real GDP (colored line)

Copyright 2008 Pearson Addison-

3-20

Figure 3.15 Percentage Deviations from Trend

in Average Labor Productivity (black line) and
Real GDP (colored line) for 19482006

Copyright 2008 Pearson Addison-

3-21

Figure 3.16 Seasonally Adjusted (black)

and Unadjusted (colored) Money Supply
for the Years 20012006

Copyright 2008 Pearson Addison-

3-22

Table 3.1 Correlation Coefficients and

Variability of Percentage Deviations from
Trend

Copyright 2008 Pearson Addison-

3-23

Table 3.2 Summary of

Business Cycle Facts

Copyright 2008 Pearson Addison-

3-24

Figure 3.17 Percentage Deviations from

Trend in Real GDP and Government
Expenditures

Copyright 2008 Pearson Addison-

3-25

Figure 3.18 Scatter Plot of Government

Expenditures Against Real GDP

Copyright 2008 Pearson Addison-

3-26

Figure 3.19 Percentage Deviations

from Trend in Real GDP and Exports

Copyright 2008 Pearson Addison-

3-27

Figure 3.20 Scatter Plot of

Exports vs. GDP

Copyright 2008 Pearson Addison-

3-28

Figure 3.21 X and Z

Copyright 2008 Pearson Addison-

3-29