1. Business Cycles

2. “Business Cycles are the result of the clustering of new inventions and innovation.” **Business cycles are the recurring ups and downs of real GDP** **Business cycles are the recurring ups and downs of real GDP**

3. -How do inventions and innovations stimulate the growth of the economy? -How do inventions and innovations stimulate the growth of the economy? -What happens to the land, labor, and capital when new production methods are employed? -What happens to the land, labor, and capital when new production methods are employed? -What effects could new productions methods have on the business cycle? -What effects could new productions methods have on the business cycle? -What innovations and inventions have changed production in our lifetime and our parents’ lifetime? -What innovations and inventions have changed production in our lifetime and our parents’ lifetime?

4. Business Cycle Recurring ups and downs of GDP Recurring ups and downs of GDP –CYCLE suggests systematic or predictable Business fluctuations: read GDP will go up and down from time to time **but to predictably!

5. Phases of the Business Cycle 1. Recession 1. Recession –A period of decline in economy measured by real GDP –Occurs when real GDP declines for 2 quarters (6 months) in a row –Begins at PEAK-when real GDP stops going up- and ends at the TROUGH- when real GDP stops going down –(begins phase 2)

6. Phases of the Business Cycle, continued 2. Expansion 2. Expansion –Period of recovery from a recession –Continues until the economy reaches a new peak

7. Phases of the Business Cycle, continued If no periods of recession and expansion occurred  economy follows even growth  TREAD LINE If no periods of recession and expansion occurred  economy follows even growth  TREAD LINE If recession becomes severe=DEPRESSION, or state of economy w/ high unemployment and massive shortages If recession becomes severe=DEPRESSION, or state of economy w/ high unemployment and massive shortages

8. Article w/ partner -Summarize the article in your own words (5 sentences) -Summarize the article in your own words (5 sentences) -What are the main points about this recession? (2-3 sentences) -What are the main points about this recession? (2-3 sentences) -Anything else significant to mention? What other economic concepts did you pick up in this article? -Anything else significant to mention? What other economic concepts did you pick up in this article? -What confused you about this article? -What confused you about this article?

9. Causes of Business Cycles Several factors work together to causes a business cycle Several factors work together to causes a business cycle None can claim to be the single explanation! None can claim to be the single explanation!

10. 1. Capital Expenditures When the economy is expanding, businesses expect future sales to be high  invest heavily in capital goods When the economy is expanding, businesses expect future sales to be high  invest heavily in capital goods –Examples? After a while, businesses pull back, causing layoffs in the capital goods industry, and eventually recession After a while, businesses pull back, causing layoffs in the capital goods industry, and eventually recession

11. 2. Inventory Adjustments Some businesses cut inventory at first sign of economic slowdown and build them at upturn Some businesses cut inventory at first sign of economic slowdown and build them at upturn 1949 good example 1949 good example

12. 3. Innovation and Imitation Innovators gain edge b/c competitors (business grows) Innovators gain edge b/c competitors (business grows) –How? Imitators invest heavily to top  boom happens and there is a hold in the industry  further investments are unnecessary and economic activity slows Imitators invest heavily to top  boom happens and there is a hold in the industry  further investments are unnecessary and economic activity slows –Example?

13. 4. Monetary Factors Credit and loan policies  is it easy to take out a loan? Credit and loan policies  is it easy to take out a loan? Stimulates economy for a short time Stimulates economy for a short time Increased demand for loans causes interest rates to rise, which in turn discourages new borrowers  borrowing and spending down, econ activity declines until interest rates fall Increased demand for loans causes interest rates to rise, which in turn discourages new borrowers  borrowing and spending down, econ activity declines until interest rates fall

14. 5. External Shocks Increases in oil prices, wars, international conflict Increases in oil prices, wars, international conflict Some shocks sent the economy up, others send it down Some shocks sent the economy up, others send it down

15. Predicting Business Cycles 1. Econometric Models: algebraic equations to describe how economy behaves 1. Econometric Models: algebraic equations to describe how economy behaves –Some adaptation of the output-expenditure model 2. Index of Leading Indicators 2. Index of Leading Indicators –10 statistical series that usually turns down before real GDP turns down and vice versa –The average time b/w dip in index and onset of recession- 13 months.

16. Activity In groups of four or five create a cartoon or some other visual that helps the class remember one of the causes of the business cycles In groups of four or five create a cartoon or some other visual that helps the class remember one of the causes of the business cycles

17. Homework Research a recession on the internet and determine its cause- you may use my wiki for additional resources and help finding examples! Make sure that you type a response, about 5 sentences. Also, you should provide the different sites and resources you used! Research a recession on the internet and determine its cause- you may use my wiki for additional resources and help finding examples! Make sure that you type a response, about 5 sentences. Also, you should provide the different sites and resources you used!