Reading 13: Business Cycles

Book 1

Four phases of the business cycle

Trough

Expansion

Peak

Contraction

Trough

• GDP growth changes from (-) to (+)

• High unemployment rate

• Spending on consumer durable goods and housing increases

• Moderate or decreasing inflation rate

Expansion

• GDP growth rate increases

• Unemployment decreases, hiring accelerates

• Investment increases in home construction

• Inflations begins to rise

• Imports increase as domestic growth accelerates

Peak

• GDP growth rate decreases

• Unemployment rate is low, but hiring slows

• Consumer spending and business investment grows at a slower rate

• Inflation rate increases

Contraction

• GDP growth rate is negative

• Unemployment increases

• Consumer spending, home construction, and business investment decreases

• Inflation rate decreases

• Imports decrease

What signals the beginning of an expansion?

Two consecutive quarters of Real GDP growth

What signals the beginning of a contraction?

Two consecutive quarters of Real GDP decline

Classic Cycle

Real GDP relative to beginning value

Growth Cycle

changes in the percentage difference between Real GDP and its longer-term trend

Growth Rate Cycle

changes in the annualized percentage growth rate from one period to the next

What are credit cycles?

cyclical fluctuations in interest rates and credit

Which lasts longer, business cycles or credit cycles?

Credit cycles

How can inventory be a business cycle indicator?

High inventory – consumer spending begins to decrease causing an too much inventory. Management begins to shut down production which signals the beginning of a contraction

Low inventory – as consumer spending picks up, low inventory levels are not enough to keep up with demand. Management begins to increase production which signals the beginning of an expansion

Largest component of GDP?

Consumer spending

Which is more positively correlated with business cycles: durable goods or services?

Durable goodsW

What causes home construction to increase?

Increase in consumer incomes

What effects home buying?

Interest rates

How does Domestic GDP Growth impact net exports?

Domestic GDP Growth increases – Higher imports

Domestic GDP Growth decreases – Lower imports

• The idea as the home currency gains in strength, the country has greater purchasing power

How does GDP Growth of Trading Partners impact net exports?

GDP Growth of Trading Partners increases – Higher exports

GDP Growth of Trading Partners increases – Lower exports

How do Currency Exchange Rates impact net exports?

Domestic currency increases – lower exports and higher imports

Domestic currency decreases – higher exports and lower imports