Download L3B Business Cycle Theory PPT

Business Cycle Theory
Changes in Business Activity
© 2009, TESCCC
Business Cycle Theory
A free market economy does not grow at a constant rate. It
goes through a series of expansions and contractions.
These fluctuations are called business cycles. Business
cycles are a pattern of the general level of economic activity
or the level of production of goods and services (GDP).
Since this is a pattern it keeps repeating itself. You can see
the business cycle activity from 1914 to 1992 below in the
graph.
© 2009, TESCCC
Business Cycle Theory
Four Phases of business
cycle are:
–Expansion
–Peak
–Contraction-recession
–Trough
© 2009, TESCCC
Contraction or Recession
For a contraction to be a true
recession, you must see 2
consecutive quarters or six
months of declining real
GDP.
© 2009, TESCCC
Business Cycle Theory
Peak
Stages
Expansion
Trough
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Recession
Expansion Phase
1.
2.
3.
4.
5.
6.
7.
© 2009, TESCCC
GDP
Durable goods
Factory order
Raw materials orders
Unemployment
Consumer confidence
problem -inflation
Contraction or Recession
1. Demand
2. GDP
3. Durable goods
4. Factory orders
5. Unemployment
6.Consumer confidence
7. problem- unemployment.
© 2009, TESCCC
Causes
• There are several things that may
lead to fluctuations in the
economy. Some are within the
economy and we call them
internal factors. Some are
outside the economy and we call
them external factors.
© 2009, TESCCC
Internal factors (within the
economic system)
1. Business Investment
In an expanding economy firms
invest in new capital goods. This
investment spending creates new
jobs and growth. If firms decide to
halt investment, this slows the
economy down and can cause
unemployment.
© 2009, TESCCC
2. Interest Rates and Credit
When interest rates go up, consumers
will not make big ticket purchases.
Lower demand slows down economy.
When interest rates go down we see
more purchases being made – causing
growth.
© 2009, TESCCC
3. Consumer Expectations
Fears of the economy slowing down can
cause consumers to stop spending. This
will then actually slow down the
economy.
If consumers feel confident about the
economy, they spend more. Spending
more can cause growth.
© 2009, TESCCC
External factors (outside the
economic system)
External Shocks
These are factors outside the economic
system, but they can cause fluctuations in
business activities. Examples include:
wars
natural disasters
foreign economies
9/11
© 2009, TESCCC