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What Are the Different Methods of Business Cycle Accounting?

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  • Written By: Osmand Vitez
  • Edited By: PJP Schroeder
  • Last Modified Date: 19 September 2016
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Business cycle accounting is a macroeconomic procedure that focuses on different factors in the business cycle. The different methods for this accounting procedure look at four separate wedges: productivity, labor, investment, and government consumption. Rather than look at large macroeconomic variables like gross domestic production or unemployment, business cycle accounting looks only at the wedges. These different methods allow for a deeper analysis into what moves the economic market. This process is not necessarily a start-to-finish accounting process but more of a timely analysis.

Separating each wedge out of a larger macroeconomic pie allows accountants to compare predictions to actual results. The use of an economic model is often necessary to make this comparison. Individuals can feed data collected from one wedge into the model and review the output. Therefore, the different wedges are the important pieces of business cycle accounting. Models may need a design that only measures the effects of one wedge at a time.

The productivity wedge is a measure of efficiency in an economy. A model here provides general input into what frictions may exist in an economy that alters productivity output. In some cases, measuring productivity in business cycle accounting can lead to discoveries that some predetermined factors initially labeled as investment. Financial constraints in a company often lead to external financing. Deeper analysis, however, will find frictions that restrict a company’s production output rather than its inability to achieve funding.

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Labor wedges in business cycle accounting tend to focus on wages paid to workers. Companies usually set wages prior to any major shifts or changes in the economy. When a major downturn occurs in the economy, a company often makes changes to labor. This leads to changes in a company’s operating procedures and ultimately leads to changes in the overall economy. A study of the marginal rates may result in fewer working hours and consumption as part of the friction.

Investment in economic terms is typically a measurement that leads to companies spending copious amounts of money on items. These expenditures may include inventory, capital assets, and other large purchases. Investments in business cycle accounting do not necessarily indicate higher consumption. Hence, the study of this wedge helps determine the purpose and factors that affect it. In some cases, measuring investments is often a poor indicator of consumption.

Government spending is the final wedge method in business cycle accounting. All expenditures made by the government have inclusion here. In many cases, individuals measure government expenditures to determine how much the government plays in the other wedges in terms of frictions. Government spending varies depending on the amount of freedom in a nation’s economy.

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