Introduction to Macroeconomics
Chapter 7
Business Cycles
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
1. Characteristics of Business Cycles
Systematic Fluctuations
Peak
Trough
Peak
Contraction
Expansion
120
115
Real GDP
110
105
100
Unemployment
Rate
(percent)
6
4
2
0
Inflation
Rate
(percent)
10
8
6
4
2
0
Introduction to Macroeconomics
(Recession)
1. Characteristics of Business Cycles
Real GDP
5%
3%
(percent per quarter)
Real GDP Growth Rate
4%
2%
1%
0%
-1%
-2%
-3%
-4%
1947Q1 1956Q1 1965Q1 1974Q1 1983Q1 1992Q1 2001Q1
Introduction to Macroeconomics
1. Characteristics of Business Cycles
Unemployment
Introduction to Macroeconomics
1. Characteristics of Business Cycles
Inflation
P T
PT
P T
PTP T
P T
Inflation Rate (percent per year)
16%
14%
Expansion
12%
10%
8%
6%
4%
2%
0%
Jan59
Jan64
Jan69
Introduction to Macroeconomics
Jan74
Jan79
Jan84
Jan89
Jan94
Jan99
Sources: Bureau of Labor Statistics
National Bureau of Economic Reasearch
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
P T
P T
P T
PTP T
P T
Index of Leading Indicators (1996 = 100)
120
110
100
90
80
70
60
50
Jan59
Jan64
Jan69
Jan74
Jan79
Jan84
Jan89
Jan94
Jan99
Sources: The Conference Board: www.tcb-indicators.org/
NBER: www.nber.org
Introduction to Macroeconomics