Business Cycle

Business Cycle Definition

• the level of economic activity fluctuates year to year

• Study of fluctuations of growth around growth trend

• Expansion and Slowdown

• Short run fluctuations

Recession

• Period of declining real income

• Rising Unemployment

• Slowing Productivity

Nature Of Recession

• short and sharp

• Lasting impacts

depression

Severe Recession

Severe Recession

Depression

Long Run economic growth

• Reflects fluctuations in the economies potential output

• In the long run potential output fluctuates

Short Run Economic activity

• Business Cycle

• Deviations of actual output from potential

• Output Gap

Output Gap formula

Actual-potential/potential x100

Output Gap definition

• Measures how much the actual output deviates from the potential

Positive Output Gap

• Boom, not sustainable

• Producing more than we have the resources for

Negative Output Gap

• Bust producing less than we have the resources for

• Leads to unemployment

Stages of the business Cycle

• Peak

• Trough

• Period of recession

• Period of expansion

Peak

• High point of economic activity

Trough

• low point of ecumenic activity

Expansion

• Period of economic growth

leading indicator- definition + example

• Predicts the future of the economy

• business confidence, consumer confidence, stock market

Lagging Indicators def + example

• follow the business cycle with delay

• Uneployment

Okuns Rule

• for every % point that actual outcome is lower than potential

• Unemployment will rise by half a %

Business cycle runs…

• Peak to Trough

Changes in business cycle caused by…

• Household spending

• Business Decisions

• Government policy

• External sources

• Confidence and Expectations

Smoothing consumption

• households make lifetime financial decisions based on expectations about the future

• Adjust to Permanent shocks

Volatile Investments

• businesses adjust investment plans to both temporary and permanent shocks

Expansion killed by…

Adverse shocks

Consumption smoothing and aggregate economy

• Used as a method to stabilize

• Sometimes makes it worse

• Credit constraints, weakness of will…no smoothing

Volatile

• Price changes rapidly

• Gov spending is not volatile

Exports- Business cycle

• Depend on demand follow the changes in business cycle

Goods producers + Service providers

• Move and fall together

• Goods more sensitive