Chapter 2 - Business cycles and forecasting

business cycle

successive periods of growth and decline in economic activities

peak

point where the economic expansion is at its highest

recession (technical recession)

negative economic growth for at least two successive quarters

depression

economic activity is at its lowest - deepening of the recession

trough

point where the economic contraction is at its lowest

amplitude

measures the distance of the oscillation of a variable from the trend line and indicates the severity of cyclical fluctuations

economic indicator

used to measure trends in the economy, e.g. GDP

trend line

a line that shows the general direction in which the indexes that were used moves, e.g. the business cycle

coincident indicators

economic indicators that usually change at the same time as changes in overall business activity

examples of coincident indicators

registered unemployed

real retail sales

lagging indicators

measures of economic performance that usually change after real GDP changes

examples of lagging indicators

unit labour costs in manufacturing

real investment in machinery and equipment

number of commercial vehicles sold

hours worked in construction

leading indicators

a set of key economic variables that economists use to predict future trends in a business cycle

examples of leading indicators

number of new motor cars sold

net new companies registered

share prices

job advertisements in the Sunday Times

composite indicator

a summary of the various indicators of the same type into a single value

extrapolation

to estimate something unknown from facts that are known

moving average

a method of repeatedly calculating a series of different average values along a time series to produce a trend line

exogenous variable

a variable that is determined outside the theory, it is an autonomous or independent variable

monetarist approach

the view that the growth path in the economy is determined by that natural growth in the supply of available resources of production

interventionist (Keynesian) approach

the view that markets are inherently unstable which implies that government must intervene to stabilise the economy

endogenous variable

A variable that is explained within a theory, sometimes called an induced variable or dependent variable

new economic paradigm

the view that demand-side as well as supply-side polices should be used to achieve long-term economic growth

Phillips curve (description)

illustrates the inverse relationship between the unemployment rate and the inflation rate

monetary policy

the measures taken by the monetary authorities to influence the quantity of money or the rate of interest with a view to achieving stable prices, full employment and economic growth

fiscal policy

the government's policy in terms of the level and composition of government spending, taxation and borrowing