THE BUSINESS CYCLE. BUSINESS CYCLES The business cycle is the upward and downward movement of economic activity or real GDP that occurs around the growth.

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Presentation transcript:

THE BUSINESS CYCLE

BUSINESS CYCLES The business cycle is the upward and downward movement of economic activity or real GDP that occurs around the growth trend. See Figure 6.1 for the U.S. historical experience.

U. S. BUSINESS CYCLES Civil War Recovery of 1895 World War I Panic of 1893 Panic of 1907 Great Depression Korean War Vietnam War World War II

BUSINESS CYCLES There are a number of policies regarding business cycles.  Classical economists generally favor laissez-faire or noninterventionist policies.  Keynesians generally favor activist or interventionist policies.

THE PHASES OF THE BUSINESS CYCLE A peak is the top of the business cycle. A trough is the bottom of the business cycle. A boom is a very high peak. A downturn is when economic activity starts to fall from a peak. A upturn is when economic activity starts to rise from a trough.

THE PHASES OF THE BUSINESS CYCLE A recession is a decline in output that persists for more than two consecutive quarters in a year.  A depression is a large recession.  A trough is also the bottom of the recession or depression.  An expansion is an upturn that lasts at least two consecutive quarters of a year.

Expansion Recession THE PHASES OF THE BUSINESS CYCLE Boom Secular growth trend Downturn Upturn Trough Peak 0 Jan.- Mar Total Output Apr.- June July- Sept. Oct.- Dec. Jan.- Mar Apr.- June July- Sept. Oct.- Dec. Jan.- Mar Apr.- June

WHY DO BUSINESS CYCLES OCCUR Recessions and expansions are caused primarily by demand-side of the economy. A debate exists about whether these fluctuations can and should be reduced. Most economists believe that potential depressions can and should be offset by economic policy.

WHY DO BUSINESS CYCLES OCCUR Since the late 1940s, compared to prior years:  Downturns and panics have generally been less severe.  The duration of business cycles has increased.  The average length of expansions has increased while the average length of contractions has decreased.

WHY DO BUSINESS CYCLES OCCUR Most economists believe that business fluctuations have become less severe because of the stronger role of government in the economy.

LEADING INDICATORS Leading indicators tell us what's likely to happen in the economy 12 to 15 months from now. The are indicators rather than predictors because they are only rough approximations of what ’ s likely to happen in the future.

LEADING INDICATORS Leading indicators include the following:  Average workweek for production workers in manufacturing.  Unemployment claims.  New orders for consumer goods and materials.

LEADING INDICATORS Leading indicators include the following:  Vendor performance, measured as a percentage of companies reporting slower deliveries from suppliers.  Index of consumer expectations.  New orders for plant and equipment.

LEADING INDICATORS Leading indicators include the following:  Number of new building permits issued for private housing units.  Change in stock prices.  Interest rate spread.  Changes in the money supply.