THE BUSINESS CYCLE N.P.

The Business Cycle It is a permanent characteristic of market economies: GDP (Gross Domestic Product = PIL) fluctuates as booms and recession follow each other. N.P.

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. N.P.

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. N.P.

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. N.P.

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. N.P. - 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’. N.P.

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. N.P.

The Business Cycle Discussion: Which theory for the business cycle do you find more convincing? Why? N.P.