Business Cycles

Business Cycles

Fluctuations in Real GDP are referred to as Business Cycles.

The duration and intensity of each phase of the Business Cycle are not always clear.

Business Cycles are typical of Market, Capitalistic economies due to the free nature of those economic systems

Phases of the Business Cycle

Expansion Peak Contraction Trough

Expansions are periods of increasing Real GDP.

Unemployment decreases, businesses expand, and Personal Consumption increases.

As expansions continue, there tend to be upward pressures on prices (inflation) and interest rates.

Expansions

A Word About Interest Rates

The amount of money charged as a fee for lending money.

The price of borrowing money. As interest rates rise LESS consumers will

borrow money IF they are WILLING and ABLE

As interest rates fall MORE consumers will borrow money IF they are WILLING and ABLE

Peak

A peak is a period when the economy starts to level off.

Businesses postpone new investments, and consumer saving tends to increase.

Rising prices and interest rates tend to restrict purchases and investments, often leading to a Contraction.

Contraction

A Contraction is a period of declining Real GDP.

Consumer spending decreases, and unemployment increases as businesses layoff workers and shorten work hours.

Interest rates and prices level off, and often decline during long contractions.

Recession:Six months of declining Real GDP

Depression:Twelve months of declining Real GDP coupled with at least 15% unemployment.

Long Term Contractions

Trough

A Trough is the bottom of a Contraction. Lower interest rates and prices bring customers back to markets.

% Change in Real GDP

Contraction

Expansion

Peak

Trough

0%

Factors That Affect the Business Cycle

Business Investment: High levels of business investment (capital good increases like machinery and equipment) promote expansion. Low levels of business investment contribute to contraction.

Money and credit: When interest rates go up, people borrow less, and this less money is circulating in the economy, thus contributing to a contraction. (and vise versa)

Factors That Affect the Business Cycle

Public Expectations: People will increase their spending if they believe the economy is strong. This helps promote expansion.

External Factors: Like energy crisis and war.

HOMEWORK Draw a business cycle (ON THE PAGE

PROVIDED IN THE PACKET) that contains all four phases. Describe the general mood that would be present among people during each phase. Most important, include an illustration, for each phase, of a related event to that phase of the business cycle – Consider the factor that affect the business cycle.

Economic Indicators

Economic Indicators are specific economic activities that have historically been good indications of the general cycle of the economy. There are three types:

* Leading* Coincident* Lagging

Leading Economic Indicators

Economic activities that tend to change 3 to 6 months before the general economy changes.

Examples:

•Stock Market•Orders for Durable Goods•Housing Starts•# of new businesses•Money Supply

•Average workweek

•Number of building permits issued

Coincident Economic Indicators

Economic activities that change at about the same time the general economy (GDP) changes

Examples:

•Personal Income•Industrial Production Levels•Retail Sales•Number of employed nonagricultural workers

Lagging Economic IndicatorsEconomic activities that tend to change 3 to 6 months after the general economy(GDP) changes

Examples:

•Interest Rates•Unemployment Duration•Consumer Debt Load•Number of business loans to be repaid