1. BUSINESS CYCLE

2. Business Cycles Business cycles are the recurring ups and downs of real GDP Also known as business fluctuations to imply that they can’t be easily predicted

3. Phases of Business Cycle 1. Recession – a period of decline in the economy as measured by changes in real GDP - occurs between the peak and trough - must decline for two consecutive quarters (6 months) to be a recession 2. Peak – the point where real GDP stops going up - Do not know we are there until GDP starts to decline

4. Phases of Business Cycle 3. Trough - the point where real GDP stops going down –- Do not know until after we start to recover that it was the trough 4. Expansion - a period of recovery from a recession - continues until the economy reaches a new peak

5. Depression If a recession becomes very severe, it may turn into a depression -a state of the economy with high unemployment, major shortages and excess capacity in manufacturing plants Only had one depression according to experts - the Great depression in 1929-1930’s

6. TRENDS IN THE US Business activity on an irregular course throughout the 20 th Century Worst downturn was the Great Depression and highest increase was the WWII era Since WWII a different pattern – mostly up with intermittent recessions

7. Causes of Business Cycles 1. Capital Expenditures a.when the economy is expanding, businesses want to expand more as well to be able to sell more b.when they feel they have grown enough, they stop the expansion which causes lay offs in the industries that provide the capital expansion

8. Causes of Business Cycles 2. Inventory Adjustments a.first sign of a downturn, companies cut back on production b.first sign of an upswing, companies start up production c.these adjustments cause fluctuations in real GDP

9. Causes of Business Cycles 3. Innovation and Imitation a.A company comes up with a new innovation that gives them an edge b.other companies must invest to keep up, and this investment spurs growth c.once they have caught up, the investment stops slowing economic activity

10. Causes of Business Cycles 4. Monetary Factors a.The credit and loan policies of the commercial banking system and the Fed b.when interest rates are low, it stimulates borrowing for additional spending c.increase in demands for loans eventually pushes up interest rates, borrowing and spending slow down, economy slows

11. Causes of Business Cycles 5. External Shocks a.increases in oil prices, wars, international conflict b.can have either effect on the economy

12. Predicting Business Cycles 1. Econometric Models a.A macroeconomic model that uses algebraic equations to describe how the economy behaves b.figures for the variables in the equation are put into equation and predictions are made c.actual changes in the economy are compared to the prediction and the model is then updated d.some models are reasonably accurate in the short term, but the farther into the future the predictions are made the less accurate they become

13. Predicting Business Cycles 2. Index of leading Indicators a.A composite of 10 statistical series that usually turn down before real GDP turns down and turn up before real GDP turns up b.length of the average workweek is one of the indicators c.no single series has proven completely reliable d.now 10 individual series are combined into an overall index that closely patterns the behavior of real GDP e.Dip 13 months before recession, up 4 months before expansion f.has not been completely accurate – predicted 3 recessions that didn’t happen