Business Cycle Chapter 14 Sect. 1
Definition • Systematic ups and downs of real GPD (Gross Domestic Product), and largely interrupt economic growth. • 4 Key Phases: • Expansion • Peak • Contraction • Trough
Expansion • The economy follows a *trend line, a steady growth path if a recession or depression does not occur. • Definition:A period of recovery from a recession. • The period of expansion would continue until the economy reaches a new peak. • Steady rise in employment. • Increase of price; however, increase profit as well and bring the state of the economy back into prosperity.
Peak • Where the economic growth stops going up and hits a plateau. • If the government will recognize this phase, they will pass policies in order to expand this phase for as long as possible before the downturn. • Once the peak is reached to its full phase, the phase of contraction is imminent.
Contraction(recession & Depression) • Recession : A period during which real GPD declines for two quarters in a row, or six consecutive months. • The recession begins when the economy reaches a peak ( where GPD stops going up) and ends when the economy reaches a trough ( the turnaround point where real GPD stops going down) • Depression: A state of the economy with large numbers of people out of work, acute shortages, and excess capacity in manufacturing plants. • Results from a recession becoming very severe. • Decline in price and profit
Results of Contraction • Decline in employment • Decline in price and profit • These results applies to a recession and intensified in a depression.
Trough • Definition:Theturnaround point where real GPD stops going down. • An expansion and recovery is expected. • And the Business Cycle repeats….
stagflation • Definition: combination of stagnant economic growth and inflation • Happened in the US in the early 1970s, people were expecting an increase in price so they bought more goods. Increased demands led to higher prices and higher wages. Which resulted in inflation and employment shortage. Resolved with Federal Reserve Board that refuses to supply the money that would increase inflation. Ex. Oil shortage during the OPEC boycott). Economy is tanking while prices is still going up.
Causes • Capital Expenditures: expectation of future sales to be high which increase the investments in capital goods ( ex. companies build new plants, equipment etc.) When businesses pull back on their capital investments, it causes layoffs in industries and result in recession
Causes • Inventory Adjustment: Changes in level of business inventories. Cut back on inventories when there is an economic slowdown. • Innovation and Imitation: • Innovation happens when a new product/new techniques enables the cost to go down and profit to go up. • Imitation happens when competitor must copy the innovation causing fluctuation in investment.
Causes • Monetary Factors: Credit and Loan policies of the Federal Reserve System. Loans were easy to get and interest rates were low. However, as the borrowers increase, the interest rates and qualifications begin to rise as well. • Borrowing and spending slows down which results in low economic activity.
Causes • External Shocks: Shocks such as increased oil prices, wars, and international conflict. Some shocks might drive the economy up. For example, when Great Britain discovered North Sea Oil in 1970s. Other shocks can be negative, such as when high oil prices hits the US in mid 2003.
How Can Business cycles be predicted? • An Econometric Model is a macroeconomic model that uses algebraic equations to describe the behavior of the economy. Output-Expenditure model. • GPD = C+I+G + ( X-M) • Index of leading indicators, a monthly statistical series that usually turns down before real GPD turns up. Not completely reliable but allows us to know the average time between changes and see short run behavior of the economy.
Where are we Currently on the business Cycles? • We are in the Phase of Expansion. • Steady recovery with decreased unemployment rate and increase in profit.
How about the Rest of the world? • Sweden is in the phase of prosperity. • China is also in the phase of prosperity. • Britain, which is in a similar situation to the US with being in the phase of Expansion. • Japan has just gone through a period of stagnation. Although they have paid of their national debt. The competition in the export market from China and America. We might expect the expansion to fail leading them in a recession.
Business Cycle Jeopardy • https://jeopardylabs.com/play/business-cycles2
Work Cited • Economics, Principles and Practice by Clayton. • http://stefanmikarlsson.blogspot.com/2006/08/different-countries-position-in.html • http://kalyan-city.blogspot.com/2011/06/4-phases-of-business-cycle-in-economics.html • http://economics.about.com
Credits • Dawn Hoang and Brenda Mariscal • Economics • Pak • 3rd period