Download the business cycle

THE BUSINESS CYCLE
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The Business Cycle
It is a permanent characteristic of market
economies: GDP (Gross Domestic
Product = PIL) fluctuates as booms and
recession follow each other.
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The Business Cycle
Boom: an economy expands, it is working at full
capacity, therefore production, employment,
prices, profits, investments and interests rates all
tend to rise.
Recession: the demand for goods and services
declines: investments, production, employment,
profits commodity and share prices, and interest
rates generally fall.
A long-lasting recession is called a depression
or a slump.
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The Business Cycle
Peak: highest point on a business cycle,
which is generally followed by a
downturn/downswing, i.e. a period of
contraction.
Trough: the lowest point on a business
cycle, which is generally followed by a
recovery, or upturn/upswing, i.e. a period
of expansion.
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Theories for the Business Cycle
Internal/Endogenous theories: they
consider it to be self-generating and
indefinitely repeating. A peak is reached
when people begin to consume less, for
whatever reason.
In the 19th century people were believed
to ‘infect’ one another with optimistic or
pessimistic expectations.
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Theories for the Business Cycle
- When economic times are good and
people feel confident about the future, they
spend more and run up debts.
- However, if interests rates run too high,
people find themselves paying more than
they anticipated and so they have to
consume less.
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- If they are worried about the possibility to
lose their jobs, they tend to save more.
Theories for the Business Cycle
External/Exogenous theories: they look
for causes outside economic activity,
e.g.: scientific advances, natural disasters,
elections or political shocks, demographic
changes, etc.
J. Schumpeter: the business cycle is
caused by major technological inventions,
which lead to periods of ‘creative
destruction’.
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Theories for the Business Cycle
Simpler Theory: when there is no
independent central bank, the business
cycle is caused by governments beginning
their period of office with a couple of years
of austerity programmes, followed by tax
cuts and monetary expansion in the two
years before the elections.
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The Business Cycle
Discussion:
Which theory for the business cycle do
you find more convincing? Why?
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