Download Business Cycles 10.2

Objectives
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1. What are the 4 phases of the business cycle?
2.What factors influence the business cycle?
3. What are the 3 leading indicators used to
determine the current phase of the business cycle
and predict where the economy is headed?
4. Terms: business cycle, expansion, peak,
contraction, trough, recession, leading indicators,
coincident indicators, lagging indicators.
5. Define/compare/contrast terms; extrapolate
current conditions into the future of economy.
Review GDP
Define GDP--- Why do you only count the “final” value
of goods and services?
 Why do you not count the value of
goods or services produced in a
previous year?
 Define “durable” and “non-durable”
goods-
Business Cycles
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Business Cycles--are fluctuations or
changes, or phases in a market systems
economic activity.
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These changes are measured by increases
or decreases in real GDP.
Phases of a Business Cycle
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Business Cycle Phases:
Expansion or recovery
 Peak
 Contraction or recession
 Trough
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Business Cycle Phases
Expansion—A period of economic
expansion and growth.
 Peak—A high point at which the
economy is at its strongest and most
prosperous.
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Business Cycle Phases, cont’d
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Contraction—When real GDP enters a
period of business slowdown.
Recession—a decline in real GDP for two or more
consecutive quarters.
Depression—are prolonged and severe recessions.
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Trough—The final stage in the
business cycle; demand, production,
and employment reach their lowest
levels
Business Cycles Diagram
Business Cycles
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Influences on the Business Cycle:
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Business investment—High levels
promote expansion; low levels contribute
to contractions.
Interest rates and credit—When
interest rates are low, businesses and
individuals generally borrow more
money.(Inverse is also true).
Influences on business cycle
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Consumer Expectations—If consumers
think economy is heading toward recession,
then they will limit their spending.
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External Factors—World economic and
political climate affect the business cycle in
the U.S.
 High oil prices of 1973, 1984.
 War affects the business cycle.
Predicting the Business Cycle
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3 Types of Economic Indicators:
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Leading indicators—(Anticipate)changes
in building permits, prices of raw materials,
stock market, interest rates.
Coincident indicators—Personal income,
sales volume, industrial production.
Lagging Indicators –Changes months after
an upturn. Ex. Business profits,
unemployment.
Markets Experience Fluctuations
Retail sales are highest in December
 Construction tends to increase in the
Spring.
 Furniture sales tend to peak in the fall.
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Data is adjusted for seasonal fluctuations
How did this December compare to last
December sales? Etc.