1. Ups and Downs of Economic Activity
Peak
Trough
Recovery
Recession

2. Business Cycles
√ The term business cycle refers to the recurrent ups and downs in the level of economic activity, which extend over several years.
√ Individual business cycles may vary greatly in duration and intensity.
√ All display a set of phases.

3. THE BUSINESS CYCLE Phases of the Business Cycle PEAK RECESSION TROUGH
Level of business activity
Time
RECESSION
TROUGH
RECOVERY
GROWTH
TREND

4. PEAK √ Peak or prosperity phase:
Time
GROWTH
TREND
Level of business activity
√ Peak or prosperity phase:
Real output in the economy is at a high level
Unemployment is low
Domestic output may be at its capacity
Inflation may be high.

5. RECESSION GROWTH TREND Time √ Contraction or recession phase:
Level of business activity
Time
RECESSION
GROWTH
TREND
√ Contraction or recession phase:
Real output is decreasing
Unemployment rate is rising.
As contraction continues, inflation pressure fades.
If the recession is prolonged, price may decline (deflation)
The government determinant for a recession is two consecutive quarters of declining output.

6. TROUGH √ Trough or depression phase: Lowest point of real GDP
Level of business activity
Time
TROUGH
GROWTH
TREND
√ Trough or depression phase:
Lowest point of real GDP
Output and unemployment “bottom out”
This phase may be short-lived or prolonged
There is no precise decline in output at which a serious recession becomes a depression.

7. RECOVERY √ Expansionary or recovery:
GROWTH
TREND
Level of business activity
Time
√ Expansionary or recovery:
Real output in the economy is increasing
Unemployment rate is declining
The upswing part of the cycle.

8. Business Cycle-one cycle through 4 phases
Peak
Peak
Real GDP
per year
Recovery
Recession
Trough
Time
One cycle

9. Recessions since 1950 show that duration and depth are varied:
Period Duration in months Depth (decline in real GDP)
— 3.0%
— 3.5%
— 1.0%
— 1.1%
— 4.3%
— 3.4%
— 2.6%
— 2.6%
app. —3.3%

10. How Indicators Monitor the Four Phases of the Business Cycle
• The Leading Indicator System
… provides a basis for monitoring the tendency to move from one phase to the next.
…assesses the strengths and weaknesses in the economy
… gives clues to a quickening or slowing of future rates of economic growth
… indicates the cyclical turning points in moving from the upward expansion to the downward recession, and from the recession to the upward recovery.

11. Leading indicators anticipate the direction in which the economy is headed.
The coincident indicators provide information about the current status of the economy
changing as the economy moves from one phase of the business cycle to the next
2) telling economists that an upturn or downturn in the economy has arrived.
Lagging indicators change months after a downturn or upturn in the economy has begun and help economists predict the duration of economic downturns or upturns.

12. These actions generate the four phases of the business cycle.
Based on the theory that expectations of future profits are the motivating force in the economy.
Companies may expand production of goods and services and investment in new structures and equipment,when business executives believe that their sales and profits will rise.
When they believe profits will decline, they reduce production and investment.
These actions generate the four phases of the business cycle.

13. Causes of Fluctuations
Innovation
Political events
Random events
Wars
Level of consumer spending
Seasonal fluctuations
Cyclical Impacts — durable and non durable

14. An Actual Business Cycle
($ billion, 1992 dollars)
Real GDP
‘80
‘85
‘90
4600
5200
6000
Peak
Peak
Trough 82
One Cycle 3 3 3

15. The Great Depression

16. The Great Depression [continued]

17. Great Depression Stats

18. Global Depression, 1929-1932 Ave. Unemployment Rate, 1925-1928
Percent Decrease in Prices,

19. Six Million “Rosie the Riveters”
World War II Production of these items brought us out
of the Great Depression.
300,000 warplanes
124,000 ships
289,000 combat vehicles and tanks
36 billion yards of cotton goods
41 billion rounds of ammunition
2.4 million military trucks
111,527 tank guns and howitzers
$288 billion was spent on the war,
$100 billion in the first six months.
Unemployment hit an all-time low of 1.2%
and personal savings were 25.5%.