Introduction to Macroeconomics Chapter 7 Business Cycles

Introduction to Macroeconomics Chapter 7. Business Cycles 1. Characteristics of Business Cycles 2. Business Cycle Relationships 3. Forecasting Business Cycles

Introduction to Macroeconomics 1. Characteristics of Business Cycles Recurrent, systematic fluctuations in the level of business activity: - real GDP growth rate - inflation - unemployment

Introduction to Macroeconomics Real GDP Unemployment Rate (percent) Inflation Rate (percent) PeakTroughPeak ContractionExpansion (Recession) 1. Characteristics of Business Cycles Systematic Fluctuations

Introduction to Macroeconomics 1. Characteristics of Business Cycles Real GDP

Introduction to Macroeconomics 1. Characteristics of Business Cycles Unemployment

Introduction to Macroeconomics 1. Characteristics of Business Cycles Inflation Sources: Bureau of Labor Statistics National Bureau of Economic Reasearch PTPTPTPTPTPT Expansion

Introduction to Macroeconomics 1. Characteristics of Business Cycles Components of GDP

Introduction to Macroeconomics 2. Business Cycle Relationships Okun’s Law: changes in GDP and unemployment Phillips Curve: unemployment and inflation

Introduction to Macroeconomics 2. Business Cycle Relationships Okun’s 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

Introduction to Macroeconomics 2. Business Cycle Relationships Okun’s Law

Introduction to Macroeconomics 2. Business Cycle Relationships Phillips Curve, 1950s and 1960s

Introduction to Macroeconomics 2. Business Cycle Relationships Phillips Curve, 1970s

Introduction to Macroeconomics 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

Introduction to Macroeconomics 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.

Introduction to Macroeconomics 3. Forecasting Business Cycles Index of Leading Economic Indicators Sources: The Conference Board: NBER: PTPTPTPTPTPT