Business Cycles

1
Business Cycles

• Chapter 14 Section 1

2
Objectives

• What is a business cycle?
• How do economists forecast business cycles?
• What causes business cycles?

3

• Real GDP
• Price (base year) x Quantity (current year)

4

• Business Cycle
• Recurrent swings (up down) in real GDP

Price
GDP
Real GDP
03
04
05
06
Year
5
5 Phases of the Business Cycle

• Peak
• Contraction
• Trough
• Recovery
• Expansion

Price
Expansion
Peak
Contraction
Recovery
Trough
Time
6
Just Curious

• Has the U.S. experienced many business cycles?
• 31 between 1854 and 1991
• Average duration of each business cycle?
• 53 months ( 4.5 years)
• Average contraction?
• 18 months (1.5 years)
• Average recovery plus expansion?
• 35 months (3 years)

7
What is the difference between a recession and
depression?

• Recession
• A slowdown in the economy marked by real GDP
  falling for two consecutive quarters
• Depression
• A deep and long recession (major scale
  duration)

8
ForecastingBusiness Cycles

• 3 Types of Indicators
• Leading
• Coincident
• Lagging
• Leading indicators tend to be more often cited

9
10 LeadingEconomic Indicators

• Average weekly hours, manufacturing
• Average weekly initial claims for unemployment
  insurance
• Manufacturers new orders, consumer goods and
  materials
• Vendor performance, slower deliveries diffusion
  index
• Manufacturers new orders, nondefense capital
  goods

10

• Building permits, new private housing units
• Stock prices, 500 common stocks
• Money supply, M2
• Interest rate spread, 10-yr Treasury bonds, less
  federal funds
• Index of consumer expectations

11
What causesthe Business Cycle?

• Money Supply
• Business Investment, Residential Construction,
  and Government Spending
• Politics
• Innovation
• Supply Shocks

12
Assessment

• What is a business cycle?
• How do economists forecast business cycles?
• What causes business cycles?