The text reads, Business Cycle: Short-term fluctuations in economic activity. The business cycle reflects the tendency for actual output to deviate from potential output. This deviation is measured using the output gap.

The graph shows Year on the horizontal axis and Output on the vertical axis. The actual output curve shows a peak which is a high point in economic activity, a trough which is a low point in economic activity, expansion which is a period of increasing economic activity (indicated by an upward-pointing arrow during a period when the graph is increasing), recession which is a period of declining economic activity (indicated by a downward-facing arrow during a period when the graph is decreasing), and potential output represented by an upward sloping curve starting from the vertical axis.

The Output gap is the gap between the potential output and actual output represented by double headed arrows from the ends of each curve.

The text continues as follows:

Output gap: The difference between actual and potential output, measured as a percentage of potential output.

Output gap equals Actual output minus potential output over potential output multiplied by 100.

Distinguish between levels (GDP measures the level of output) and changes (GDP growth is about changes).

Features of Business Cycles

1. Business cycles are not cycles.

2. Recessions vary in their causes, their duration, and their depth.

3. Some variable s lead recessions, while others lag.

4. The business cycle is persistent.

5. A typical business cycle involves a short, sharp, recession, followed by a long and gradual expansion.

6. Many economic variables move up and down together over the business cycle.

Okun’s rule of thumb: For every percentage point that actual output falls below potential output, the unemployment rate is around half a percentage point higher.

Using Macroeconomic Data

Seasonally adjusted: Data stripped of predictable seasonal patterns.

Annualized rate: Data converted to the rate that would occur if the same growth rate had occurred throughout the year.

Nominal variables: Variables expressed in the prices of the year of the data.

Real variables: Variables adjusted for inflation you you’re comparing quantities, holding prices constant.

Leading indicators: Variables that tend to predict the future path of the economy.

Lagging indicators: Variables that follows the business cycle with a delay.

Revisions: Updates to earlier estimates.

Top 10 Economic Indications

Real GDP growth, Real GDI growth, Change in nonfarm payrolls, unemployment rate, initial unemployment rate, business confidence, consumer confidence, inflation rate, employment cost index, stock market

Five Rules to track the Economy

1. Track many indicators 2. Broad indicators beat narrow indicators 3. Seek just-in-time data 4. Find the signal amid the noise 5. Adjust your outlook when data differ from expectations