Macroeconomics

Chapter 8:
Business Cycles

ECON2220 Intermediate Macroeconomics

Wataru Miyamoto
Spring 2024

Copyright © 2020 Pearson Education Ltd. 1

Chapter Outline
• What is a Business Cycle?
• The American Business Cycle: The Historical Record
• Business Cycle Facts
• Business Cycle Analysis: A Preview

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Figure 1.1: Output of the U.S. economy, 1869–2017

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Figure: Real GDP Growth in the US

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Figure: GDP, Consumption, Investment, and
Government Expenditure

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Figure: During the Great Recession

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Figure: During the COVID-19 Recession

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Figure: Unemployment Rate

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What Is a Business Cycle?
• U.S. research on cycles began in 1920 at the National Bureau of
Economic Research (NBER)
• NBER maintains the business cycle chronology—a detailed history of business
cycles

• Five main points about business cycles:

• (1) Business cycles are fluctuations of aggregate economic activity,
not a specific variable
• GDP, consumption, investment, government expenditure, unemployment rate
etc.
• Still GDP and unemployment rate are the most important statistics

• (2) There are expansions and contractions

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Figure 8.1: A business cycle

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What Is a Business Cycle?
• Expansions and contractions
• Aggregate economic activity declines in a contraction or recession until it
reaches a trough

• After a trough, activity increases in an expansion or boom until it reaches a

peak

• A particularly severe recession is called a depression

• The sequence from one peak to the next, or from one trough to the next, is a
business cycle
• Peaks and troughs are turning points
• Turning points are officially designated by the NBER Business Cycle Dating
Committee

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What Is a Business Cycle?
• (3) Economic variables show comovement—they have regular and
predictable patterns of behavior over the course of the business cycle
• GDP, Consumption, and investment typically move in the same direction

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What Is a Business Cycle?
• (4) The business cycle is recurrent, but not periodic
• Recurrent means the pattern of contraction–trough–expansion–peak occurs
again and again
• Not being periodic means that it doesn't occur at regular, predictable intervals

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What Is a Business Cycle?
• (5) The business cycle is persistent
• Declines are followed by further declines; growth is followed by more growth
• Because of persistence, forecasting turning points is quite important

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What Is a Business Cycle?
• Should we even care about the business cycle?
• At most, about 5 (or 10) % ups and downs each quarter
• Not too large changes
• Fluctuations not important

• Counter arguments
• Short-run fluctuations to long run growth
• Persistent decrease in income
• Different effects on people
• Who bears the cost?
• Employed vs unemployed

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Figure: The U.S. unemployment rate, 1890–2017

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The American Business Cycle:
The Historical Record
• The Great Depression and World War II
• The worst economic contraction was the Great Depression of the 1930s
• It began after the stock market crash in October 1929
• Real GDP fell nearly 30% from the peak in August 1929 to the trough in March
1933
• The unemployment rate rose from 3% to nearly 25%
• Thousands of banks failed, the stock market collapsed, many farmers went
bankrupt

• The Great Depression ended with the start of World War II

• Wartime production brought the unemployment rate below 2%
• Real GDP almost doubled between 1939 and 1944

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The American Business Cycle:
The Historical Record
• Post–World War II business cycles
• The OPEC oil shock of 1973 caused a sharp recession, with real GDP declining
3%, the unemployment rate rising to 9%, and inflation rising to over 10%

• The Great Recession

• The longest and deepest recession since the Great Depression began in
December 2007
• Began with a housing crisis
• Followed by a financial crisis that rivaled that of the Great Depression
• Unemployment rose above 10% for the first time since 1982
• Sluggish economic growth even after the recession ended in 2009

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Business Cycle Facts
• All business cycles have features in common
• The cyclical behavior of economic variables—direction and timing

• What direction does a variable move relative to aggregate economic activity?

• Procyclical: in the same direction

• Countercyclical: in the opposite direction

• Acyclical: with no clear pattern

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Business Cycle Facts
• All business cycles have features in common
• What is the timing of a variable's movements relative to aggregate economic
activity?
• Leading: in advance

• Coincident: at the same time

• Lagging: after

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Business Cycle Facts
• Cyclical behavior of key macroeconomic variables
• Procyclical
• Coincident: industrial production, consumption, business fixed investment,
employment
• Leading: residential investment, inventory investment, average labor
productivity, money growth, stock prices
• Lagging: inflation, nominal interest rates
• Timing not designated: government purchases, real wage

• Sometimes, the pattern is not so clear

• There is subjective judgement to some extent
• Example: Government purchases
• Procyclical or countercyclical?

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Summary 10: The
Cyclical Behavior of
Key Macroeconomic
Variables (The
Business Cycle
Facts)

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Figure 8.4: Cyclical behavior of the index of industrial
production, 1947–2021

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Figure 8.8: Cyclical behavior of the Unemployment rate,
1955–2021

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Figure 8.11: Cyclical behavior of average labor
productivity and the real wage, 1955Q1–2021Q1

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Figure: Average Hourly Earnings of All Employees and
CPI, 2007–2022

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Figure 8.12: Cyclical behavior of nominal money growth
and inflation, 1960–2021

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Figure 8.13: Cyclical behavior of the nominal interest
rate, 1947–2021

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Business Cycle Facts
• International aspects of the business cycle
• The cyclical behavior of key economic variables in other countries is similar to
that in the United States
• Major industrial countries frequently have recessions and expansions at
about the same time
• Next figure illustrates common cycles for Japan, Canada, the United States,
Germany, and the United Kingdom
• In addition, each economy faces small fluctuations that aren't shared with
other countries

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Figure: Real GDP growth rates

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Figure: Real GDP growth rates

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Figure: Core Inflation (year over year)

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Summary
• Fluctuations of aggregate economic activity

• Some common features

• Unpredictable but recurrent and persistent

• Key macroeconomic variables have comovements

• Can be problematic
• High unemployment rate

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