Business Cycles

1
Business Cycles
2
GDP and Real GDP

• GDP ? total market value of all finished goods
  and services produced annually in an economy.
• Real GDP ?GDP adjusted for price changes. Pbase
  year X Qcurrent year real GDP
• Business Cycle ? recurrent swings in real GDP.

3
Peak
Recovery
Contraction
Trough

• Peak real GDP at temporary high.
• Contraction real GDP decreases. A decrease of 2
  or more quarters is a recession.
• Trough low point of real GDP.
• Recovery real GDP rises.

4

• A typical business cycle lasts 4 to 5 years.
  Between 1854 and 1991 the US went through 31
  cycles.
• Contractions averaged 18 months.
• Recoveries averaged 35 months.

5

• Can we make a prediction about the current
  recovery?

6
Recession vs. Depression

• A depression is a deep and long recession.

7
Types of Economic Indicators

• 1. Leading ? lets you know what is coming.
• 2. Coincident ? coincides with the condition of
  the economy.
• 3. Lagging ? measure after the fact.
• Leading indicators are most often reported in the
  news, probably because people are interested in
  the future.

8
Causes of Business Cycles

• There are different theories on this.

9
Money supply

• lowering supply or a decline in the growth
  rate has a negative impact.

10
Business Investment, Residential Construction,
and Government Spending

• A decline in these has a negative impact.

11
Politics

• To get re-elected, politicians pass spending
  bills to improve the economy.

12
Innovation

• A new product or innovation results in other
  firms trying to copy, which requires increased
  investments.

13
Supply Shocks

• Reduction in supply due to war or natural
  disaster has negative impact on the economy.

14
Conclusion

• Business cycles are inevitable part of the
  economy. The Federal Reserve Board and Congress
  try to impact the cycle by making the peaks long
  and the contractions short and shallow.
• Monetary and fiscal policies are used to this end.