Chapter 14

Business Cycles and Economic Growth

AGENDA Fri 3/23 & Mon 4/2

• QOD # 23: Economic Growth

• Review HW

• Business Cycles

• Economic Indicators

• HW: R& R

QOD #23: Economic Growth

• Suppose you heard on the nightly news that the United States economy is experiencing growth. – What do you think this means?– How might you see this in observable reality? In

other words, what evidence would there be of the growth?

– How might this impact your life? Would it be for the better or the worse?

Business Cycles• If real GDP is on a roller-coaster – rising and

falling - the economy is said to be on a business cycle.– business cycles – recurrent swings (up and down)

in real GDP– recession – a slowdown in the economy marked by

real GDP falling for two consecutive quarters

• The typical business cycle is four to five years.

Business cycle

Here are the typical 5 phases of the business cycle:

1. Peak: When the real GDP is temporarily high.

2. Contraction: If the real GDP decreases, the economy is said to be in a contraction. If real GDP declines for two consecutive quarters (four in per year), the economy is in a recession.

Here are the typical 5 phases of the business cycle:

3.Trough: The low point in real GDP, just before it begins to turn up.

4.Recovery: The period when real GDP is rising.

5.Expansion: Refers to increases in real GDP beyond the recovery

Business cycle

Questions?1. How many business cycles has the

United States gone through since WWII?

2. How long did the contraction period of the Great Depression last?

3. When did the latest contraction begin?

Answer1. 10 cycles (last peak 2007)

2. 43 months

3. Dec 2007 (GDP ↑ July 2009, but end TBD)

• between 1854 and 1991 the US has been through thirty-one business cycles– average business cycle was fifty-three months– average time from peak to trough is 18 months– average time from trough to next peak was 35

months

Can you Forecast Business Cycles?

• A fever can be called a coincident indicator of the flu; it coincides with the upturns and downturns of the illness.

• Similarly, in the economy coincident indicators coincide with economic upturns and downturns.

Forecasting business cycles• Economists have devised a few indicators of the health

and sickness of the economy

• Leading indicators -lead economic upturns and downturns, will rise before an upturn and fall before a downturn

• stock market, money supply, consumer confidence• Coincident indicators- coincide with economic upturns

and downturns, reaches its high point with peak and low point with the trough

• unemployment rate• Lagging indicators- lag behind economic upturns and

downturns, reaches its peak after the peak and its low after the trough

• personal income

Stock prices

• Are stock prices a leading, coincident, or a lagging indicator of the economy?

Here are 10 Leading Economic Indicators:

1) Average weekly hours, manufacturing.2) Average weekly initial claims for unemployment

insurance.3) Manufacturers’ new orders, consumer goods and

materials.4) Vendor performance, slower deliveries, diffusion index.5) Manufacturers’ new orders, nondefense capital goods.6) Building permits, new private housing units.7) Stock prices8) Money supply9) Interest rate spread, 10-year Treasury bonds10) Consumer price index

What Causes The Business Cycle?Different economists identify different causes of the business

cycle.• Money Supply

– changes in the money supply cause contraction and expansion• Business Investment • Residential Construction and Government Spending• Politics• Innovation

– seeds of business cycles• Supply Shocks

– changes affect the capacity to produce • e.g. WW II, ME conflict

What Causes Economic Growth

• Natural Resources: With more natural resources a country can produce more goods and services.

• Labor: With more labor, it is possible to produce more output.

• Capital: This can lead to increases in labor productivity and therefore to increase in output or real GDP.

• Technological Advances: This can make it possible to obtain more output from the same amount of resources.

• Incentives: Economic growth developed where people were given the incentive to produce and innovate.

Economic Growth

• Economic Growth refers to either absolute real economic growth or per-capita economic growth.

• Absolute real economic growth- an increase in real GDP from one period to the next.

• Per-capita economic growth- an increase from one period to the next in per-capita real GDP, which is divided by population.

References

• Arnold, R (2001). Economics in our times, 2nd edition. Chicago, IL: National

Textbook Company .