Measuring Business Cycles

Executive Summary

three types of shocks: supply shock, private demand shock and policy shock. Short-time shifts in aggregate supply and aggregate demand have an impact on output, employment and price level as these factors are closely interconnected. Therefore economists use variables to track output, employment and price level in order to find out the current business cycle phase and to select the correct instruments or if necessary to start the counteractive measurements.

The most important factor in determining the phase of the business cycle is the economic activity measured by gross domestic product (GDP), a procyclical variable. A positive GDP indicates that the economy is growing (expansion phase) and vice versa a negative GDP shows the economy is declining (contraction phase). Potential GDP shows the possible output under full employment. The harmonisation of potential and real GDP can be influenced by decreasing the unemployment rate (share of unemployed people of labor force. Unemployment rate develops counter cyclically. In case economic activity increases (expansion phase), unemployment rate will fall and vice versa. Another important factor is inflation. High inflation devaluates value of money and rising inflation will increase the demand for higher wages leading to lower output.

The objective of macroeconomic policy is to track the variables and to find the correct respond to each development. Possible instruments may be focussing on stability in employment, prices and growth.

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Measuring  Business Cycles  

Table of Contents

Executive  Summary.  i

Table of  Contents  ii

List  of Abbreviations  iii

List  of Figures  iv

List  of Tables  v

1.  Business cycle.  1

1.1.  Introduction  1

1.2.  General progression.  1

1.3.  Causes  3

1.4.  Economic impacts  5

2.  Measurements.  7

2.1.  Determination of variables.  7

2.2.  Potential income and real gross domestic product  8

2.3.  Full employment and unemployment rate  9

2.4.  Price Stability and inflation rate  10

2.5.  Economic indicators and solutions  10

Bibliography.   12

Appendix 1:  IT-MChecklist 1: 360-degree analysis.  13

Appendix 2:  Nominal GDP calculation.  16

Appendix 3:  Calculation of unemployment rate  17

Appendix 4:  Calculation of inflation rate  18

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Measuring Business Cycles

List of Abbreviations

EU European Union

GDP Gross Domestic Product

ILO International Labor Organization

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Measuring  Business Cycles  

List  of Figures  

Figure  1: Phases of a business cycle  

Figure  2: A hypothetical pattern of business cycles.  

Figure  3: Classification of population determining labor force  

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Measuring Business Cycles

List of Tables

Table 1: Relationship between economy and variables..................................7  Table 2: Nominal GDP calculation................................................................16 

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