1. Sara Shackett AP/IB Economics
Business Cycles
Sara Shackett
AP/IB Economics

2. What interesting details do you see in this photo?
What’s happening in the photo?
What does this image reveal about consumer spending and business from ?
What economic data might you use to explain what you see in the photo?

3. Which year was rGDP growth the lowest? The highest?
Based on what you know about GDP and how it’s determined, what might explain the decline in GDP before 1933?
What might explain its increase after 1940?
What might explain fluctuations between 1933 and 1940?

10. Business Cycle
The business cycle describes economic fluctuations: the rising and falling of output in relation to potential output.
Potential output is the level of output that the economy can sustain given the capital stock, technology and full employment.
Source: Advanced Placement Economics Teacher Resource Manual, National Council on Economic Education, New York, NY.

11. The Business Cycle
Recovery
Contraction
Downturn

12. Phases of the Business Cycle
Recession = 2 consecutive quarters (6 months) of negative growth in real GDP (decline in total output).
Peak = The point at which output starts to decline. It’s the beginning of the recession. Business activity reaches a temporary maximum with full employment and near-capacity output.

13. Phases continued
Trough = the point at which output starts to increase. It’s the end of the recession.
Recovery Period/Expansion = The period between the rough and the next peak. Economy is moving forward and expanding toward the full-employment level.

15. Impact of Cycle on Indicators
The business cycle is defined in terms of output, but other variables follow the movement of output.
Investment and consumption both rise and fall with movements in real GDP.
Inflation typically declines during recessions and increases as the economy approaches the peak.
The unemployment rate rises sharply in recessions.

16. Unemployment Rate Effects During Recession
Initially, the unemployment rate rises.
If the recession lasts a long time, the unemployment rate remains at a high level or might actually decline as discouraged workers leave the ranks of the unemployed.
As the recovery begins, the unemployment rate may remain very steady at a high level.
As the economy recovers and people find jobs, other people enter the labor market looking for work and thus the unemployment rate remains steady.

17. Theories about causation
Major innovations may trigger new investment and/or consumption spending.
Changes in productivity may be a related cause.
Most agree that the level of aggregate spending is important, especially changes on capital goods and consumer durables.

18. Key Points
There is no consistent length of time for each phase. (figure 8.1, table 8-2)
Business cycles are unpredictable. After the fact, economists can identify some of the causes of business cycles but are notoriously poor at predicting the actual downturn.

22. Your task
Explain the business cycle with the help of the circular flow of income model. What is happening during an expansion? What is happening during a contraction? Focus on injections and leakages.