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Macroeconomics: Sixth Canadian Edition

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64 views22 pages

Macroeconomics: Sixth Canadian Edition

Uploaded by

YONG ZHOU
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Macroeconomics

Sixth Canadian Edition

Chapter 3
Business Cycle
Measurement

Copyright © 2021 Pearson Canada Inc.


Chapter 3 Topics
• Regularities in GDP fluctuations.
• Comovement
• Behavior of Key Macroeconomic Variables.
• Summary of Key Business Cycle Facts

Copyright © 2021 Pearson Canada Inc.


Regularities in GDP Fluctuations
• Business Cycles are fluctuations about trend in real GDP.
• The turning points in the deviations of real GDP from trend
are peaks and troughs.
• Persistent positive deviations from trend are booms and
persistent negative deviations from trend are recessions.

Copyright © 2021 Pearson Canada Inc.


Figure 3.1
Idealized Business Cycles

The red curve is an idealized path for real GDP over time, while the blue line is the growth trend in real
GDP. Note that real GDP cycles around the trend over time, with the maximum negative deviation from
trend being a trough and the maximum positive deviation from trend being a peak. The amplitude is the
size of the maximum deviation from trend, and the frequency is the number of peaks that occur within a
year’s time.

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Deviations From Trend in Real GDP are
Irregular
• The fluctuations in GDP about trend are quite choppy.
• There is no regularity in the amplitude of fluctuations in
real GDP about trend.
• There is no regularity in the frequency of fluctuations in
real GDP about trend.

Copyright © 2021 Pearson Canada Inc.


Figure 3.2
Percentage Deviations from Trend in Real GDP, 1961-2018

Of particular note are the four most recent recessions, in 1974–1975, 1981–1982, 1990–1992, and 2008–
2009.

Copyright © 2021 Pearson Canada Inc.


Figure 3.3
Time Series Plots of x and y

(a) Two time series that are positively correlated: when x is high (low), y tends to be high (low). (b) Two
time series that are negatively correlated: when x is high (low), y tends to be low (high).

Copyright © 2021 Pearson Canada Inc.


Figure 3.4
Scatter Plots of y and x

(a) x and y are positively correlated. (b) x and y are negatively correlated. (c) x and y are uncorrelated.

Copyright © 2021 Pearson Canada Inc.


Correlation with Real GDP
• If the deviations from trend in a macroeconomic variable
are positively (negatively) correlated with the deviations
from trend in real GDP, then that variable is procyclical
(countercyclical).
• If a macroeconomic variable is neither procyclical nor
countercyclical, it is acyclical.

Copyright © 2021 Pearson Canada Inc.


Figure 3.5
Imports and GDP for Canada, 1961–2018

This figure, as an example, shows the time series of percentage deviations from trend in real imports and
real GDP for Canada for the period 1961–2018. Imports and GDP are clearly positively correlated, so
imports are procyclical.

Copyright © 2021 Pearson Canada Inc.


Figure 3.6
Scatter Plot of Imports and GDP for Canada, 1961–2018

This figure shows the same data as Figure 3.5 but in scatter plot rather than time series form. We again
observe the positive correlation between imports and GDP, as a positively sloped straight line would best
fit the scatter plot; and again, imports are procyclical.

Copyright © 2021 Pearson Canada Inc.


Figure 3.7
Leading and Lagging Variables

In (a) x is a leading variable, as its peaks and troughs tend to precede those of real GDP. In (b) x is a
lagging variable, as the peaks and troughs in real GDP tend to lead those in x.

Copyright © 2021 Pearson Canada Inc.


Figure 3.8
Percentage Deviations from Trend in Real GDP and the TSE
Composite Index.

The stock index tends to lead real GDP.

Copyright © 2021 Pearson Canada Inc.


Behavior of Key Macroeconomic Variables
• Components of GDP: consumption and investment.
• The price level and inflation.
• Labour market variables: employment, real wage, average
labour productivity.

Copyright © 2021 Pearson Canada Inc.


Figure 3.9
Percentage Deviations from Trend in Real Consumption and Real
GDP for Canada, 1961–2018

From the figure, we can observe that consumption is procyclical, coincident, and less variable than GDP.

Copyright © 2021 Pearson Canada Inc.


Figure 3.10
Percentage Deviations from Trend in Real Investment and Real
GDP for Canada, 1961–2018

We can observe from the figure that investment is procyclical, coincident, and more variable than GDP.

Copyright © 2021 Pearson Canada Inc.


Figure 3.11
Percentage Deviations from Trend in the Price Level and Real
GDP, 1961–2018

The figure shows essentially zero correlation. There is no discernible Phillips curve correlation.

Copyright © 2021 Pearson Canada Inc.


Figure 3.12
Percentage Deviation from Trend in Real GDP, and Deviation from
Trend in the Inflation Rate, 1961–2018

The inflation rate and real GDP are positively correlated, consistent with traditional Phillips curve ideas.

Copyright © 2021 Pearson Canada Inc.


Figure 3.14
Percentage Deviations from Trend in Employment and Real GDP
for Canada, 1976–2018

Employment is procyclical; it is a lagging variable; and it is less variable than real GDP.

Copyright © 2021 Pearson Canada Inc.


Figure 3.15
Percentage Deviations from Trend in Average Labour Productivity
and Real GDP

Average labour productivity is procyclical and coincident, and it is less variable than real GDP.

Copyright © 2021 Pearson Canada Inc.


Table 3.1
Correlation Coefficients and Variability of Percentage Deviations
from Trend

Correlation StdDev(variable)/StdDev(GDP)
Coefficient (GDP)
Consumption 0.78 0.83
Investment 0.81 5.09
Employment 0.79 0.80
Average labour productivity 0.65 0.64

Copyright © 2021 Pearson Canada Inc.


Table 3.2
Summary of Business Cycle Facts

Cyclicality Lead/Lag Variability Relative to GDP


Consumption Procyclical Coincident Smaller
Investment Procyclical Coincident Larger
Employment Procyclical Lagging Smaller
Real wage rate Procyclical ? ?
Average labour productivity Procyclical Coincident Smaller

Copyright © 2021 Pearson Canada Inc.

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