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Objectives

Objectives. 1. What are the 4 phases of the business cycle? 2.What factors influence the business cycle? 3. What are the 3 leading indicators used to determine the current phase of the business cycle and predict where the economy is headed?

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Objectives

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  1. Objectives • 1. What are the 4 phases of the business cycle? • 2.What factors influence the business cycle? • 3. What are the 3 leading indicators used to determine the current phase of the business cycle and predict where the economy is headed? • 4. Terms: business cycle, expansion, peak, contraction, trough, recession, leading indicators, coincident indicators, lagging indicators. • 5. Define/compare/contrast terms; extrapolate current conditions into the future of economy.

  2. Review GDP • Define GDP---- • Why do you only count the “final” value of goods and services? • Why do you not count the value of goods or services produced in a previous year? • Define “durable” and “non-durable” goods--

  3. Business Cycles • Business Cycles--are fluctuations, or changes, in a market systems’ economic activity. • These changes are measured by increases or decreases in real GDP. • Characterized by periods of economic growth followed by periods of economic decline.

  4. Business Cycles • While the cycle of up and downs is consistent, the severity and the length of time they last does not.

  5. Phases of a Business Cycle • Business Cycle Phases: • Expansion or recovery • Peak • Contraction or recession • Trough

  6. Business Cycle Phases • Expansion—A period of economic expansion and growth. • Peak—A high point at which the economy is at its strongest and most prosperous.

  7. Business Cycle Phases, cont’d • Contraction—When real GDP enters a period of business slowdown. Recession—a decline in real GDP for two or more consecutive quarters. Depression—are prolonged and severe recessions. • Trough—The final stage in the business cycle; demand, production, and employment reach their lowest levels

  8. Business Cycles Diagram

  9. Business Cycles • Influences on the Business Cycle: • Business investment—High levels promote expansion; low levels contribute to contractions. • Interest rates and credit—When interest rates are low, businesses and individuals generally borrow more money. (Inverse is also true).

  10. Influences on business cycle • Consumer Expectations—If consumers think the economy is heading toward recession, then they will limit their spending. • External Factors / Shocks —World economic and political climate affect the business cycle in the U.S. • High oil prices of 1973, 1984. • War affects the business cycle.

  11. Predicting the Business Cycle • 3 Types of Economic Indicators: • Leading indicators—(Anticipate)changes in building permits, prices of raw materials, stock market • Coincident indicators—Personal income, sales volume, industrial production. • Lagging Indicators –Changes months after an upturn or downturn Ex. Business profits, unemployment.

  12. Economic Conditions The best…and the worst • Economic Growth: ideal economic condition where there is steady long-term growth in GDP, low levels of unemployment, and businesses are prospering. • Stagflation: Unusual (economists thought impossible before the 1970’s) and destructive economic condition where there is high inflation, high unemployment, and declining output.

  13. Markets Experience Fluctuations • Retail sales are highest in December • Construction tends to increase in the Spring. • Furniture sales tend to peak in the fall. • Data is adjusted for seasonal fluctuations • How did this December compare to last December sales? Etc.

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