Download Business Cycles

Business Cycles
Definition: Business cycles are
fluctuations, or changes, in a
market system’s economic
activity. These fluctuations are
measured by increases or
decreases in real GDP.
Phases of the Business Cycle
The business cycle has four
stages:
1. Expansion or recovery
2. Peak
3. Contraction or recession
4.
Trough
 Expansion: A period of
economic expansion and
growth.
 Peak: A high point, at which
the economy is at its
strongest and most
prosperous.
 Contraction: When real GDP
stops increasing, the
business cycle enters a
period of business slowdown.
A recession is a decline in
real GDP for two or more
consecutive quarters (6
months or more).
 Depression: Prolonged and
severe recession=Great
Depression.
 Trough: When demand,
production, and employment
reach lowest levels.
Influences on the Business Cycle
Business Investment
 High levels of business
investment promote
expansion in the business
cycle, while low levels of
investment contribute to
contractions (decline in
real GDP).
Real GDP=The value of a
nation’s gross domestic
product (GDP) after it has
been adjusted for inflation
(in increase in overall prices
that results from rising
wages).
• Business expansion is
important for 3 reasons:
1. Purchasing new capital
goods=business create a
demand for the goods.
2. Businesses use the new
capital to promote
efficiency.
3. Increase in research and
development of new
capital goods stimulates
technological change.
Influences on the Business Cycle
Money and Credit
 Individuals and businesses
borrow more money to
make purchases when
interest rates are low.
When interest rates are
high borrowing decreases.
Public Expectations:
 If consumers believe the
economy is heading for a
recession they limit
spending and visa versa.
External Factors:
 Changes in the world’s
economic or political
climate can affect the
business cycle in the
United States.
What economic or
political issue affect
the business cycle in
the U.S.?
Predicting the Business Cycle
Economists
try to predict
fluctuations
in business
cycles.
Economists
rely on three
types of
economic
indicators.
• Leading Indicators: Anticipate the
direction in which the economy is
headed. Ex: stock prices, consumer
goods.
• Coincident Indicators: looking at
upturns and downturns. Ex:
personal income, sales volume.
• Lagging Indicators: The duration
of economic upturns and
downturns. Ex: Number and size
of business incomes.