Summary of chapter 30 and 11 of the book Economics. Written by N. Gregory Mankiw and Mark P. Taylor, 3rd edition. Written for IBMS students of Avans or for the course Economics. ISBN 9781408093795.
Recession – characterised by a period of falling incomes, rising unemployment and technically occurs
after 2 successive quarters of negative growth.
Depression – a severe recession.
Business cycle – the fluctuations in economic growth around the trend growth.
Data we will be looking at in this chapter is classed as time series data – observations on a variable
over a time-period and which are ordered over time.
Data concepts
GDP shows a pattern of peaks and troughs and periods where growth is accelerating, decelerating
and in some cases is declining.
Peak – where economic activity reaches a high and real output begins to decline.
Trough – where economic activity reaches a low and the decline ends.
(we speak of ‘accelerating’ and ‘decelerating’ to describe changes in growth of GDP when its positive)
Contraction – when real output is lower than the previous time period.
Amplitude – the difference between peak and trough and trend output.
Trends (point of disagreement about time series data)
Trend – the underlying long term movement in a data series.
Trends can demonstrate patterns over a period which can be described as :
- stationary data – time series data that has a constant mean value over time.
- nonstationary data – time series data where the mean value can either rise or fall over time.
Deterministic trends – are constant, positive or negative independent of time for the series being
analyzed.
Stochastic trend – trend variables change by some random amount in each time period.
Procyclical and Countercyclical Movements in Macroeconomic Data
Comovement – refers to the movement of pairs of variables.
Procyclical – is a variable that is above trend when GDP is above trend.
• Real wages/ nominal interest is an example.
Countercyclical – is a variable is that is below trend when GDP is above trend.
• Unemployment is an example
Variables as indicators
Cyclical indicators can have three characteristics:
- leading indicators – indicator which can be used to foretell future changes in economic activity
- lagging indicator – indicator which occurs after changes in economic activity have occurred
- coincident indicator – indicator which occurs at the same time as changes in economic activity 4
Causes of changes in the business cycle
Changes can be caused by:
1. Household spending decisions – they decide on how much labour to supply.
2. Firms’ decision making – decisions about production levels, how much output to produce.
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