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    Business Cycles

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    Ayush Kumar
    The business cycle refers to recurrent ups and downs in economic activity over several years. All business cycles display four phases - peak, recession, trough, and recovery. During a peak, economic activity is high but inflation rises. A recession is a period of declining output and rising unemployment. At the trough, output and unemployment bottom out. Recovery sees increasing output and falling unemployment. Leading, coincident, and lagging indicators are used to monitor where the economy is in the business cycle phases. The cycle is driven by expectations of future profits that cause fluctuations in production, investment, and spending over time.

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    Business Cycles

    Uploaded by

    Ayush Kumar
    9 views11 pages
    The business cycle refers to recurrent ups and downs in economic activity over several years. All business cycles display four phases - peak, recession, trough, and recovery. During a peak, economic activity is high but inflation rises. A recession is a period of declining output and rising unemployment. At the trough, output and unemployment bottom out. Recovery sees increasing output and falling unemployment. Leading, coincident, and lagging indicators are used to monitor where the economy is in the business cycle phases. The cycle is driven by expectations of future profits that cause fluctuations in production, investment, and spending over time.

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    Business Cycles

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    The business cycle refers to recurrent ups and downs in economic activity over several years. All business cycles display four phases - peak, recession, trough, and recovery. During a peak, economic activity is high but inflation rises. A recession is a period of declining output and rising unemployment. At the trough, output and unemployment bottom out. Recovery sees increasing output and falling unemployment. Leading, coincident, and lagging indicators are used to monitor where the economy is in the business cycle phases. The cycle is driven by expectations of future profits that cause fluctuations in production, investment, and spending over time.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    9 views11 pages

    Business Cycles

    Uploaded by

    Ayush Kumar
    The business cycle refers to recurrent ups and downs in economic activity over several years. All business cycles display four phases - peak, recession, trough, and recovery. During a peak, economic activity is high but inflation rises. A recession is a period of declining output and rising unemployment. At the trough, output and unemployment bottom out. Recovery sees increasing output and falling unemployment. Leading, coincident, and lagging indicators are used to monitor where the economy is in the business cycle phases. The cycle is driven by expectations of future profits that cause fluctuations in production, investment, and spending over time.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 11

    Business Cycles

    • The term business cycle refers to


    the recurrent ups and downs in the
    level of economic activity, which
    extend over several years.
    • Individual business cycles may
    vary greatly in duration and
    intensity.
    • All display a set of phases.
    THE BUSINESS CYCLE
    Phases of the Business Cycle
    PEAK
    RECESSION TROUGH RECOVERY
    Level of business activity

    Time
    Level of business activity
    PEAK

    • Peak or prosperity phase: Time


    • Real output in the economy is
    at a high level
    • Unemployment is low
    • Domestic output may be at its
    capacity
    • Inflation may be high.
    Level of business activity
    RECESSION

    Time
    √ Contraction or recession phase:
    Real output is decreasing
    Unemployment rate is rising.
    As contraction continues, inflation pressure fades.
    If the recession is prolonged, price may decline (deflation)
    The government determinant for a recession is two consecutive
    quarters of declining output.
    TROUGH

    Level of business activity

    Time
    √ Trough or depression phase:
    Lowest point of real GDP
    Output and unemployment “bottom out”
    This phase may be short-lived or prolonged
    There is no precise decline in output at which a
    serious recession becomes a depression.
    RECOVERY

    Level of business activity

    Time
    √ Expansionary or recovery:
    Real output in the economy is increasing
    Unemployment rate is declining
    The upswing part of the cycle.
    Business Cycle-one cycle through 4 phases
    Real GDP

    Peak
    per year

    Peak

    Trough

    One cycle Time


    How Indicators Monitor the
    Four Phases of the Business Cycle
    • The Leading Indicator System
    … provides a basis for monitoring the tendency
    to move from one phase to the next.
    …assesses the strengths and weaknesses in the
    economy
    … gives clues to a quickening or slowing of future
    rates of economic growth
    … indicates the cyclical turning points in moving
    from the upward expansion to the downward recession,
    and from the recession to the upward recovery.
    Leading indicators anticipate the direction in which the
    economy is headed.
    The coincident indicators provide information about
    the current status of the economy
    1) changing as the economy moves from one phase
    of the business cycle to the next
    2) telling economists that an upturn or downturn in
    the economy has arrived.
    Lagging indicators change months after a downturn or
    upturn in the economy has begun and help economists
    predict the duration of economic downturns or upturns.
    Based on the theory that expectations of future profits
    are the motivating force in the economy.
    Companies may expand production of goods and
    services and investment in new structures and
    equipment,when business executives believe that their
    sales and profits will rise.
    When they believe profits will decline, they reduce
    production and investment.
    These actions generate the four phases of the
    business cycle.
    Causes of Fluctuations
    Innovation
    Political events
    Random events
    Wars
    Level of consumer spending
    Seasonal fluctuations
    Cyclical Impacts — durable and non durable

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