Business Cycle Facts: How related macroeconomic variables move with GDP


Co-movement: Cyclicality, Variability, Timing

This second part of business cycles, reveals the patterns which are consistent over time.

It examines how variables such as Consumption (C), investement (I) etc. move alongside fluctuations in GDP.

Cyclicality with GDP - correlation betwen deviations from trend in GDP and deviations from trend in other variables

Variability with GDP - the extent to which business cycles exhibit greater or lesser amplitude than GDP

Timing with GDP - The timing of the business cycle deviations in other variables with respect to GDP, reveals whether the variables are leading or lagging ones.

Cyclicality (correlated deviations from trend) 

Pro-cyclical: positive correlation with deviations from trend in GDP

Counter-cyclical: negative correlation with deviations from trend in GDP

A-cyclical: deviations from trend are uncorrelated with the deviations from trend in GDP

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Co-movement: Cyclicality, Variability, Timing

Components of GDP:

Y = C + I + G + ( X - M )

Total amount goods and services in the economy = Consumption + Investment + Government Expenditure + Net Imports {Exports - Imports}

US Economy: 

C ~ 70%

 I ~ 15%

G ~ 20 % (it's about 40% in the UK)

X - M ~ 5% (too small to take into account for macroeconomic purposes)

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Co-movement: Cyclicality, Variability, Timing

Real Variables:


 Cyclicality: pro-cyclical (correlation coefficient: 0.76)

Variability: less variable than GDP (standard deviation measure: 75.9% which makes it 3/4 as variable as GDP, this effectively means that the GDP peaks and throughs are 1/4 larger those of consumption)

Timing: no clear lead/lag


Cyclicality: pro-cyclical (correlation coefficient 0.84)

Variability: much more variable (standard deviation measure: 478.9%, nearly 5 times that of GDP: far more volatile) 

Timing: co-incident 

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Co-movement: Cyclicality, Variability, Timing

Government Expenditure

Cyclicality: no obvious correlation

Variability: no obvious trend (sporradic variability)

Timing: no obvious relationship

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