CHAPTER 3
Business Cycle Measurement
KEY IDEAS IN THIS CHAPTER
1 Key business cycle facts relate to the properties of deviations of important
macroeconomic variables from trend and the co-movements in these deviations.
2 The most important business cycle fact is that real GDP fluctuates about the trend in
an irregular fashion.
3 Business cycles are similar in terms of the co-movements among macroeconomic
time series.
4 Consumption is procyclical, coincident, and less variable than GDP.
5 Investment is procyclical, coincident, and more variable than GDP.
6 In the data set examined in the textbook:
a) The price level is acylical, coincident, and about as variable as GDP.
b) The money supply is procyclical, leading, and more variable than GDP.
c) The real wage is procyclical.
d) The average labour productivity is procyclical, coincident, and less variable than
GDP.
NEW IN THE FOURTH EDITION
1. All data and graphs have been updated.
TEACHING GOALS
Chapter 3 stresses the importance of observation as a foundation for scientific exploration
in macroeconomics. Because there are mountains of data measurements about the
macroeconomy, we need to begin to organize these data in such a way that we can start to
look for regularities in the economy—regularities that we hope to explain. The
cornerstone of business cycle analysis is deviations from trend in real GDP. Students
must first understand the difference between long-run trends and deviations from trend in
real GDP.
Instructor’s Manual for Macroeconomics, Fourth Canadian Edition
One of the most exciting things about the study of business cycles is the observation that
each of these recurring cycles is not unique. Because successive business cycles are more
alike than they are different, we have the hope of providing an explanation of business
cycles that can be applied consistently to each new cycle we encounter. These business
cycle regularities, the ‘stylized facts’ of business cycles, provide us with the first clues
about the nature of the typical cycle. Although students may take some time to digest and
remember these facts, it is important to be clear about the motivation for cataloguing
these facts.
CLASSROOM DISCUSSION TOPICS
To get the ball rolling, it might be useful to ask students whether they have concerns
about recessions, such as the most recent one. Ask them what harm they think a severe
recession brings. Do they believe that a cataclysmic event like the Great Depression
might occur during their lifetime? How was the most recent recession similar to or
different from the Great Depression? When they hear about the possibility of bad times,
who (or what) do they blame? Does government cause recessions? Can government do
anything about recessions? Should government try to do anything about recessions?
Macroeconomics is primarily concerned with business cycles and economic growth. Ask
the students which of these two topics is most important. A typical comparison is
Chapter 3: Business Cycle Measurement
OUTLINE
1. Regularities in GDP Fluctuations
a) Features of Business Cycles
i) Peaks
ii) Troughs
vi) Persistence
b) Business Cycle Regularities
i) Business Cycles are Persistent
ii) Deviations from Trend are Choppy
iii) Variability in Amplitude
iv) Variability in Frequency
c) Forecasting at the Bank of Canada (Macroeconomics in Action 3.1)
2. Co-movement
a) Time Series Observations
b) Correlation
i) Time Series Comparisons
ii) Scatter Plots
iii) Correlation Coefficient
c) Cyclical Properties
d) Timing
i) Leading
ii) Lagging
iii) Coincident
e) The Index of Leading Indicators
f) Variability of Time Series
3. The Components of GDP
a) Consumption
i) Procyclical
ii) Coincident
iii) Less Variable than Real GDP
b) Investment
i) Procyclical
ii) Coincident
Instructor’s Manual for Macroeconomics, Fourth Canadian Edition
iii) Residential and Inventory Investment Lead Real GDP
iv) More Variable than Real GDP
4. Nominal Variables
a) The Phillips Curve
b) Aggregate Price Level
i) Procyclical during the World Wars
ii) Countercyclical and Coincident since 1961
iii) Lags Real GDP
c) Money Supply
5. Labour Market Variables
a) Employment
i) Procyclical
ii) Lags GDP
iii) Less Variable than Real GDP
b) Real Wage Rates
i) Procyclical
ii) Aggregation Problems
c) Average Labour Productivity
6. Seasonal Adjustment
7. Co-movement Summary
Chapter 3: Business Cycle Measurement
TEXTBOOK QUESTION SOLUTIONS
Problems
1. We know from our key business cycle facts that employment N is procyclical.
Therefore, in a boom (recession), output Y and N would typically both increase
2. Expenditure on consumer durables is more like expenditure on investment goods than
expenditure on consumer nondurables or services. Economically, we want to think of
consumption as the flow of services that a consumer receives from either using up a
3. a) Y is more variable than G. From the plot, on average the percentage deviations
from trend in GDP are larger than those for government spending.
4. The phenomenon we observe in Figure 3.20 is sometimes called “jobless recoveries.”
In a typical recession, as we see in the figure, employment falls quickly below trend,
5. a) In the time series, we would see the number of birds flying south increasing as
temperature starts to decrease, with the peak in birds flying south occurring before
6. In Figure 3.21, the inflation rate and the unemployment rate appear to be
uncorrelated, i.e. we cannot discern a Phillips curve in this data. Just observing this