1. Business Cycle Measurement Definition Properties of BC BC Facts

2. Business Cycles are the cyclical movement of GDP over time. Phases of the Business Cycle - Peak(Boom) - Trough(Depression) - Expansion(Recovery) - Contraction(Recession)

3. Figure 3.2 Percentage Deviations from Trend in Real GDP from 1947--2003

4. Figure 3.1 Idealized Business Cycles

5. US. Business Cycles

6. (Robert Lucas, 1995 Nobel Laureate, Understanding Business Cycles)(Robert Lucas, 1995 Nobel Laureate, Understanding Business Cycles) “Though there is absolutely no theoretical reason to anticipate it, one is lead by the facts to conclude that, with respect to the qualitative behavior of co- movements among series, business cycles are all alike…”“Though there is absolutely no theoretical reason to anticipate it, one is lead by the facts to conclude that, with respect to the qualitative behavior of co- movements among series, business cycles are all alike…”

7. (Lucas, continued) (“…it suggests a possibility of a unified explanation of business cycles, grounded in the general laws governing market economies, rather than in political or institutional characteristics specific to particular countries or periods.”)

8. Co-Movement An economic variable is (1)Procyclical – moves in same direction as GDP. (2)Countercyclical – moves in opposite direction as GDP (3)Acyclical – no observed relation to GDP

9. Figure 3.4 Correlations Between Variables y and x

10. Timing An economic variable is (1)Leading – changes before GDP. (2)Lagging – changes after GDP (3)Co-Incident – changes at same time as GDP

11. Figure 3.7 Leading and Lagging Variables

12. Figure 3.8 Real GDP (colored line) and the Index of Leading Economic Indicators (black line) for 1959–2003

13. US Business Cycle Facts Persistence: GDP above trend today  above trend tomorrow. Aggregate expenditures (C, I, G, NX) are procyclical. C is less volatile than Y, I is more volatile that Y. Employment (N) is procyclical Unemployment is countercyclical Labor Productivity (Y/N) is procyclical Little correlation between  and N. Slightly leads GDP.

14. Persistence of business cycles: -There is a high correlation between current GDP and one-period lagged GDP:Corr (Y t Y t-1 ) = 0.86 -If GDP is above trend by X amount today, it will likely be above trend by 86%X tomorrow.

15. Figure 3.9 Real Consumption (black line) and Real GDP (colored line)

16. Figure 3.10 Real Investment (black line)and Real GDP (colored line)

17. Figure 3.14 Employment (black line) and Real GDP (colored line)

18. Figure 3.15 Average Labor Productivity (black line) and Real GDP (colored line) for 1948–2003

19. Money supply (M s ) growth is procyclical and leading. Price Level (P) is countercyclical Inflation  is procyclical and lagging.

20. Figure 3.13 Money Supply (black line) and Real GDP (colored line) for the Period 1959–2003

21. Figure 3.12 Price Level and GDP

22. Table 3.1 Correlation Coefficients and Variability

23. Table 3.2 Summary of Business Cycle Facts