Introduction to Macroeconomics

1. Introduction to Macroeconomics Chapter 7 Business Cycles

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

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

4. 1. Characteristics of Business Cycles Systematic Fluctuations Peak Trough Peak Contraction Expansion (Recession) Real GDP Unemployment Rate (percent) Inflation Rate (percent) Introduction to Macroeconomics

5. 1. Characteristics of Business Cycles Real GDP Introduction to Macroeconomics

6. 1. Characteristics of Business Cycles Unemployment Introduction to Macroeconomics

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

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

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

10. 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

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

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

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

14. 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

15. 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

16. 3. Forecasting Business Cycles Index of Leading Economic Indicators P T P T P T P T P T P T Sources: The Conference Board: www.tcb-indicators.org/ NBER: www.nber.org Introduction to Macroeconomics