The Business Cycle

The business cycle involves ups and downs in economic activity.
A key question is whether a 9% month-to-month annualized increase in consumer prices is unusual.
The answer depends on the stage of the business cycle.

Money is a tool for exchanging resources for goods and services.
Four functions of money:
- Medium of exchange
- Unit of account
- Standard of deferred payment
- Store of value
Various items have been used as money throughout history, including:
- Woodpecker skulls
- Cowrie shells
- Stones
- Pecus
- People
- Tobacco
- Wampum
- Corn
- Animal teeth
- Bark
- Cloth
- Barley
- Beads
- Butter
- Feathers
- Fish
- Fur
- Liquor
- Oats
- Peas
- Paper
- Pieces
- Sal
- Tobacco
- Strings
- Whale teeth
- Metals

Economic indicators need to be placed in proper context to aid decision-making at micro and macro levels.
Key economic indicators:
- Inflation: An upward movement in the average level of prices
- Demand-Pull Inflation: Aggregate demand exceeds aggregate supply, causing consumers to bid up prices.
- Cost-Push Inflation: Sustained increases in production costs cause prices to rise.
- Gross Domestic Product (GDP): The main measure of overall economic activity.

Definition: The value of all final goods and services produced within a nation's borders.
Two types of GDP:
- Nominal GDP: Measured in current prices.
- Real GDP: Takes inflation into account by measuring GDP in constant prices.
Following other economic indicators is necessary to track and understand the business cycle, even though GDP is a broad measure of economic activity.

A business cycle consists of ups and downs in economic activity.
Economic activity is like ecological activity, with fluctuations brought about by seasonal changes (but the analogy is not perfect.)
Ups and downs in economic activity are irregular and unpredictable, like a roller coaster ride.
Graphs illustrating real GDP (RGDP) year-to-year percentage change show irregular growth rates in actual U.S. RGDP.
Forecasts suggest that the U.S. economic expansion would slow sharply in 2025 and remain below the long-term average.

Market participants are responsible for activity in a business cycle.
Market participants include:
- Households: Ordinary people who work and consume goods/services.
- Firms: Businesses that produce goods and services.
- Government: Consumes and produces goods and services.

The business cycle has four distinct stages:
- Stage 1: Trough to Recovery
- Stage 2: Recovery to Expansion
- Stage 3: Expansion to Peak
- Stage 4: Peak to Contraction
The stages and turning points:
- Stage 1: Trough to Recovery
  - Economic activity is contracting, possibly due to a downturn in demand.
  - Firms layoff workers, reduce production, and cut prices due to excess goods on hand.
  - The economy is in a state of recession.
  - Falling prices revive demand, and economic activity bottoms out at the trough turning point.
- Stage 2: Recovery to Expansion
  - Economic activity is slowly expanding.
  - Incomes start to rise as more people return to work, and demand increases without price cuts.
- Stage 3: Expansion to Peak
  - The economy is nearing full capacity.
  - Increasing incomes lead to increasing demand, increasing pressure on production, increased bank activity to finance production expansion, and an increased need for workers (which leads to another increase in incomes).
- Stage 4: Peak to Contraction
  - Firms and households can borrow money and spend more than they earn using the credit market.
  - Production levels become dependent on the continued availability of credit.
  - Consumers’ debt burdens become so heavy that they must reduce their consumption.
  - Demand falls, inventories of unsold goods build up, and economic activity peaks (peak turning point). The contraction part of the business cycle begins.