The business cycle refers to the fluctuations in economic activity over time, marked by periods of expansion (growth) and contraction (recession).
Measured by the rise and fall in real GDP, it reflects changes in overall economic performance.
Peak: Maximum level of economic activity, characterized by high consumer and business confidence, full employment, and potential for inflation due to high demand.
Recession: Defined by two consecutive quarters of declining real GDP, leading to decreased business and consumer spending, rising unemployment, and potentially falling prices.
Trough: Lowest point in the business cycle, characterized by widespread unemployment and low economic confidence.
Expansion: Recovery phase where spending increases, businesses ramp up production, and employment rises, although inflation may begin to increase again.
Peak: High spending and production with full employment; inflation is likely.
Recession: Spending and production decline; businesses cut back on hiring; unemployment rises.
Trough: Very low spending and production; consumer and business confidence is low.
Expansion: Economic activity resumes growth; businesses begin hiring again; inflationary pressures can resurface.
The Composite Leading Index (CLI) is used to predict periods of economic expansion or recession.
CLI provides early signals about the health of the economy.
Typically, unemployment rates rise during economic downturns as demand decreases, leading to less consumer spending.
GDP is influenced by total spending in the economy, and lower spending results in reduced production and increased unemployment.
Labour Force: Comprises individuals who are employed or actively seeking employment.
Unemployment Types:
Frictional Unemployment: Short-term; arises as workers transition between jobs or enter the labor market.
Structural Unemployment: Occurs when skills are mismatched with job demands, often due to technological changes.
Cyclical Unemployment: Related to the business cycle; increases during recessions.
Seasonal Unemployment: Linked to seasonal demand fluctuations for labor.
Unemployment Rate: Percentage of unemployed individuals within the labor force.
Calculated as Unemployed / Labour Force.
Labour Force Participation Rate: Proportion of the working-age population that is part of the labor force.
Unemployment has multiple impacts:
Economic costs due to lost output.
Social costs, like increased poverty and crime.
Leads to skill obsolescence and lower self-esteem among jobless workers.
For Frictional Unemployment: Improve job matching and information dissemination.
For Structural Unemployment: Provide training and education for skills development.
For Cyclical Unemployment: Increase government spending and investment to stimulate the economy.
For Seasonal Unemployment: Offer alternative job opportunities during low demand periods.
Inflation: A sustained increase in the general price level.
Deflation: A sustained decrease in the general price level.
Measurement indices include the Consumer Price Index (CPI) and Producer Price Index (PPI).
CPI measures the average price of a basket of goods over time.
Inflation leads to:
Loss of purchasing power.
Positive effects for producers but negative for fixed income earners, savers, and creditors.
Demand-Pull Inflation: Occurs when strong demand outpaces supply.
Cost-Push Inflation: Results from rising production costs.
Imported Inflation: Caused by price increases in imported goods.
Deflation can lead to decreased consumer spending, impacting economic growth negatively.
It redistributes income and wealth, often hurting borrowers while benefiting savers.
Defined as an extremely rapid and sustained rise in prices, typically exceeding 50% per month.
Often results from excessive growth in the money supply, leading to economic instability.