Chapter 17

1. Macroeconomic Trends and Cycles

Tracking the 2. Common Characteristics of
Business Cycle Business Cycles

3. Analysing Macroeconomic Data

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Chapter 17
Distinguish between long-
run economic trends and 1. Macroeconomic Trends and Cycles
short-run fluctuations:
 Trend growth and the
2. Common Characteristics of
output gap Business Cycles

 Business cycles are not 3. Analysing Macroeconomic Data

cycles

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 The chief economist of Ray White real estate
Before Mirvac decides to build a new apartment complex,
it looks at forecasts of people like Nerida Conisbee, the
chief economist at Ray White real estate.
 She is in charge of making sure that property investors
are well informed about the economy.

Conisbee’s assessment of the strength of the economy and

how long she expects it to stay strong is actionable
information that will help her colleagues adjust their
property development, sales, and financing plans.
 Boom economy = ramp up construction!
 Recession = hold off on new projects

Year-to-year economic fluctuations have a major impact

on business and people’s lives.
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 Key Definitions Diving into the Definition
Long-run economic growth reflects growth in Business cycles cause actual output to
a country’s potential output. deviate from potential output.
Potential output: the level of output that
occurs when all resources are fully employed.
 What we can sustainably produce given
our current resources.

HOWEVER, in the short run, the economy

may fail to meet its potential.
Business cycle: short-term fluctuations in
economic activity.
 Short-turn deviations from potential output.

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 The ups and downs of the business cycle
The Unemployment Rate Fluctuates over the Business
Cycle.
While recessions don’t usually last
long, they have a lasting impact on
people’s careers:
 Research shows that even
decades later, people who
graduated in a recession tend to
earn less than those who
graduated in better economic
times.

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 Key Definition
Recall, business cycles cause actual
output to deviate from potential output
Output gap: the difference between
actual and potential output, measured as
a percentage of potential output.
Output gap =
× 100
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Diving into the Definition
Negative output gap: The economy is
producing less than it can.
 Idle resources: workers can’t find
jobs, storefronts are shuttered, etc.
Positive output gap: The economy is
producing more than its potential.
 This unsustainable intensity is
possible only for a short while.
 Think about your life in the days
leading up to an exam.
 Examining Australian Output Gaps

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 Stages of the business cycle

Peak: a high point in economic activity.

Trough: a low point in economic activity.
Recession: a period of declining
economic activity.
 Runs from peak to trough.

Expansion: a period of increasing

economic activity.
 Runs from trough to peak.
 Expansions keep going until they’re
killed by an adverse shock (they don’t
die of old age).

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 Business cycles are NOT cycles

The economy’s fluctuations are

NOT rhythmic, reliable, or
predictable.
 Some expansions have lasted
only a year, while others
have lasted for decades.

Expansions end because of

some adverse shock.
 Recessions are NOT
inevitable.

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 Key take-aways: Macroeconomic trends and cycles

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Chapter 17
Describe the common
1. Macroeconomic Trends and Cycles
features of business cycles:
 Common features 2. Common Characteristics of
Business Cycles
 Okun’s Rule of Thumb
3. Analysing Macroeconomic Data

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 Common characteristics of business cycles

“every unhappy family is unhappy in its own way.” - Anna Karenina

No two business cycles are ever the same, but they do have some common
features:
 Recessions are short and sharp; expansions are long and gradual.
 Business cycles are persistent.
 Business cycles impact many parts of the economy.

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 Short, Sharp Recessions and Long, Gradual Expansions

Since World War II, the average

recession has lasted less than one
year, while the average economic
expansion has lasted 11 years.

Recessions triggered by various

disruptions:
 slowing productivity, oil price
hikes, high interest rates, banking
crises, and a global pandemic

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 Business cycles are persistent

The state of the economy this year is

closely related to the conditions next
year.

Understanding the figure:

 45-degree line represents if this
year’s conditions were to repeat
themselves next year
 Output gap would never
change.

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 Interdependence principle and comovement
Comovement: variables that move up and down together.
 If one part of the economy is doing well, the other parts of the economy are probably also doing well.

State Unemployment Rates Rise and Fall Together

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 Different economic indicators rise and fall together

Other indicators that move

together.
 creation of new businesses,
housing construction, car
sales, imports from overseas,
new investment projects,
business profits, workers’ real
wages, stock prices, inflation
and interest rates

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 Most Private-Sector Industries Rise and Fall Together

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 Leading indicators Lagging indicators
Variables that tend to predict the Variables that tend to follow
future path of the economy. business cycle movements with a
 Give a sense of where the bit of a delay.
economy is headed.
 Tend to change first. Examples:
Examples:  Unemployment
 Business confidence;
consumer confidence; the
stock market.
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 Okun’s rule of thumb
Okun’s Rule of Thumb Links Unemployment and
For every percentage point that actual
GDP
output is less than potential output, the
unemployment rate will be around half
a percentage point higher.
Example:
 Output gap: decline from 0% to
−2%.
 Unemployment rate will likely rise
by about 1% (maybe from 5% to
6%).

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 Key take-aways:
Common characteristics of business cycles

Features of business cycles:

1. Business cycles are not cycles. 5. A typical business cycles involves
2. Recessions vary in their causes, a short, sharp recession, followed
duration, and depth. by a long and gradual expansion.
3. Some variables lead recessions, 6. Many economic variables comove
while others lag. up and down together over the
4. The business cycle is persistent. business cycle.

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Chapter 17
Learn to use macroeconomic
data to track the economy: 1. Macroeconomic Trends and Cycles
 The basics of
macroeconomic data 2. Common Characteristics of
Business Cycles
 Top Ten Economic
Indicators 3. Analysing Macroeconomic Data
 An economy watcher’s
guide

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 Seasonally adjusted: data stripped of predictable seasonal patterns.
 Helps you see the underlying trends.

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 Annualised rates
Different data series are collected at
different rates:
 Weekly, monthly, quarterly,
annually.
For easier comparison of data with
different rates, use annualised rates.
 Annualised rates: data converted
to the rate that would occur if the
same rate had occurred throughout
the year.
 Data from a time period of less than
a year converted into an annual rate.
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Real data
Recall: real variables are adjusted
for inflation.
 Comparing quantities, holding
prices constant.
 Measured in something like
“chained 2012 dollars”
Nominal data makes it difficult to
tell whether an increase reflects rising
prices or rising quantities.
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 Pay attention to data revisions

Updates to earlier estimates are called revisions.

 Some data is frequently revised.
 Revised because initial estimates can be based on incomplete data.

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 Top Ten Economic Indicators:

1. Real GDP 6. Business confidence

2. Real GDI 7. Consumer confidence
3. Employment 8. Inflation
4. Unemployment rate 9. Wage price index
5. Real retail sales 10. The stock market

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 Indicator 1: Real GDP is the broadest
measure of economic activity.
 Measures the total size of the
economy.
 CAUTION: incomplete when first
released.
Indicator 2: Real GDI acts as a useful
cross-check on GDP.
 Gross Domestic Income adds up
total income.
 GDP and GDI should be equal, but
often differ.
 Early reports of GDI are often more
reliable than GDP.
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Indicator 3: Employment tell you if the
labour market is improving.
 Tracks how many jobs are created each
month.
 One of the most important indicators
Indicator 4: The unemployment rate is an
indicator of excess capacity.
 Share of the labour force that wants a
job but can’t find one.
Indicator 5: Real retail sales provide a
timely indicator.
 Tells you how much money people are
spending, including on discretionary
items.
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 Indicator 6: Business confidence tells
you what managers are planning.
 Performance of Manufacturing
Index.
Indicator 7: Consumer confidence
tells you what consumers are thinking.
 Asks regular people how optimistic
they are about the economy.
 Westpac/Melbourne Institute
Consumer Sentiment Index
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Indicator 8: The inflation rate tells you
what’s happening with prices.
 Consumer price index provides a sense
of how much economy-wide prices are
growing.
Indicator 9: The wage price index tells
you what’s happening with wages.
 How fast wages and benefits are rising.
 Leading indicator of inflationary
pressure.
Indicator 10: The stock market tells you
about future expected profits of businesses.
 CAREFUL: “The stock market has
predicted nine out of the last five
recessions.” Macmillan Learning, ©2023
 A dashboard for tracking the economy

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 An economy watcher’s guide
1. Track many indicators (not just one)
 Imperfect measures
2. Broad indicators beat narrow indicators.
 Give more weight to indicators that
account for a greater share of the
economy.
3. Seek just-in-time data and distinguish
between leading and lagging indicators.
 Timely indicators about current trends.
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4. Find the signal amid the noise.
 Averaging over the past few data points.
 Look past volatile components.
5. Adjust your outlook when data differ from
expectations.
 If the data show that the economy is
stronger or weaker than you expected,
then you’ll need to adjust your outlook.
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 Key take-aways: Analysing macroeconomic data

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Chapter 17
1. The business cycle reflects
the tendency for actual 1. Macroeconomic Trends and Cycles
output to deviate from
potential output. 2. Common Characteristics of
2. Business cycles are not Business Cycles
cycles.
3. Analysing Macroeconomic Data
3. The top ten economic
indicators can help you get a
sense of the economic
condition of the country.

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