BUSINESS CYCLE

Chapter 14 Sect. 1

DEFINITION

Systematic ups and downs of real GPD (Gross Domestic

Product), and largely interrupt economic growth.

4 Key Phases:

1. Expansion

2. Peak

3. Contraction

4. Trough

EXPANSION

The economy follows a *trend line, a steady growth

path if a recession or depression does not occur.

Definition: A period of recovery from a recession.

The period of expansion would continue until the

economy reaches a new peak.

Steady rise in employment.

Prices begin to increase; profits increase

PEAK

When economic growth stops or hits a plateau.

Hope for government to recognize this phase &

pass policies to expand this phase as long as possible

before a downturn.

Once the peak is reached to its full phase, the

phase of contraction is imminent.

C O N T R A C T I O N( R E C E S S I O N & D E P R E S S I O N )

Contraction: a downturn in the economy (GDP stops growing &

begins shrinking)

Recession : a serious contraction marked by two consecutive

negative growth of GDP (decline in GDP for six consecutive

months)

Depression: A severe recession with no hope of end in sight!

A state of the economy with large numbers of people out of work

acute shortages

excess capacity in manufacturing plants

Decline in price and profit

TROUGH

Definition: The turnaround point where real GPD

stops negative growth & once again begins

positive growth

The official end of contraction, recession,

depression

An expansion and recovery is expected

And the Business Cycle repeats….

TAKE A LOOK @ WHAT IS HAPPENING

CAUSES

Capital Expenditures: • expectation of future sales to be high which increase

the investments in capital goods ( ex. companies build new plants, equipment etc.)

• When expectations negative, businesses pull back on their capital investments which causes layoffs in industries and result in recession

CAUSES

Inventory Adjustment: • Changes in level of business inventories. Cut back on

inventories when an economic slowdown expected• Extra inventory ordered when economic expansion

expected

Innovation and Imitation: • Innovation happens when a new product/new techniques

enables the cost to go down and profit to go up• Imitation happens when competitor must copy the

innovation causing fluctuation in investment

CAUSES

External Shocks: Shocks such as increased oil

prices, wars, and international conflict. Some shocks

might drive the economy up. For example, when

Great Britain discovered North Sea Oil in 1970s.

Other shocks can be negative, such as when high oil

prices hits the US in mid 2003.

HOW CAN BUSINESS CYCLES BE PREDICTED?

Use of Econometric Model that use macroeconomic

equations such as:• GDP = C+I+G + ( X-M)

Index of leading indicators, a monthly statistical

series that usually turns down before real GPD turns

up. Not completely reliable but allows us to know the

average time between changes and see short run

behavior of the economy.

WHERE ARE WE CURRENTLY ON THE BUSINESS CYCLES?

We are in the Phase of Expansion.

Steady recovery with decreased unemployment

rate and increase in profit.

HOW AB OUT THE REST OF THE WORLD?

Sweden is in the phase of prosperity

China is in bit of contractionary phase

Britain, which is in a similar situation to the US

with being in the phase of Expansion

Japan has just gone through a period of stagflation