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.

THE BUSINESS CYCLE

Phases of the Business Cycle
PEAK RECESSION TROUGH

RECOVERY

Level of business activity

Time

Level of business activity

PEAK

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.

Time

Level of business activity

RECESSION

Time 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.

Level of business activity

TROUGH

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.

Time

Level of business activity

RECOVERY

Time

Expansionary or recovery: Real output in the economy is increasing

Unemployment rate is declining

The upswing part of the cycle.

Business Cycle-one cycle through 4 phases

Real GDP per year
Peak Peak

Trough

One cycle

Time

Recessions since 1950 show that duration and depth are varied:
Period 1953-54 1957-58 1960-61 1969-70 1973-75 1980 1981-82 1990-91 2001 Duration in months 10 8 10 11 16 6 16 8 8 Depth (decline in real GDP) 3.0% 3.5% 1.0% 1.1% 4.3% 3.4% 2.6% 2.6% app. 3.3%

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.

 Leading indicators anticipate the direction in which the economy is headed. The coincident indicators provide information about the current status of the economy 1) 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.

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.

Causes of Fluctuations
Innovation

Political events
Random events Wars Level of consumer spending Seasonal fluctuations Cyclical Impacts durable and non durable

An Actual Business Cycle

1981 - 1990 ($ billion, 1992 dollars)
Real GDP
6000

Peak

5200
4600

Peak

Trough
80 82 85 90

One Cycle

The Great Depression

The Great Depression [continued]

Great Depression Stats

Global Depression, 1929-1932

Ave. Unemployment Rate, 1925-1928 Ave. Unemployment Rate, 1929-1933 Percent Decrease in Prices, 1929-1932

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%.