Business Cycles

Chapter 17

Business Cycle

Short term fluctuations in economic activity.

Potential Output

The level of output that occurs when all resources are fully employed.

Output Gap

the difference between actual and potential output, measured as a percentage of potential output.

Boom

When the economy is operating above its sustainable potential. Corresponds with a positive output gap.

Bust

When the economy is underperforming its potential, and so corresponds with a negative output gap.

Levels

The recent high and low in the level of GDP.

Changes

Whether economic activity is rising or falling.

Persistence

The state of the economy this year is closely related to conditions next year.

Comovement

Tendency for economic variables to rise and fall together. (If one part of the economy is doing well, then other parts of the economy are probably also doing well)

Leading Indicators

Variables that tend to predict the future path of the economy. (Consumer confidence)

Lagging Indicators

Variables that tend to follow business cycle movements with a bit of a delay (Unemployment)

Okun’s Rule of Thumb

For every 1% that actual output falls below potential output, the unemployment rate will rise by about 0.5% above the natural rate of unemployment (Quantifies the relationship between output and the unemployment rate)

Seasonally Adjusted

The removal of predictable seasonal influences (Higher ice cream production in summer)

Annualized Rate

Data converted to a rate that would occur if the current rate continued throughout the year.

Short-run Analysis

Focuses on fluctuations around potential output that typically only last for a few years.

S&P 500

A stock market index tracking the performance of roughly 500 of the largest publicly traded companies in the United States