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Business Cycle

Business Cycle. Chapter 14 Sect. 1. Definition. Systematic ups and downs of real GPD (Gross Domestic Product), and largely interrupt economic growth. 4 Key Phases : Expansion Peak Contraction Trough. Expansion.

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Business Cycle

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  1. Business Cycle Chapter 14 Sect. 1

  2. Definition • Systematic ups and downs of real GPD (Gross Domestic Product), and largely interrupt economic growth. • 4 Key Phases: • Expansion • Peak • Contraction • Trough

  3. Expansion • The economy follows a *trend line, a steady growth path if a recession or depression does not occur. • Definition:A period of recovery from a recession. • The period of expansion would continue until the economy reaches a new peak. • Steady rise in employment. • Prices begin to increase; profits increase

  4. Peak • When economic growth stops or hits a plateau. • Hope for government to recognize this phase & pass policies to expand this phase as long as possible before adownturn. • Once the peak is reached to its full phase, the phase of contraction is imminent.

  5. Contraction(recession & Depression) • Contraction: a downturn in the economy (GDP stops growing & begins shrinking) • Recession: a serious contraction marked by two consecutive negative growth of GDP (decline in GDP for six consecutive months) • Depression: A severe recession with no hope of end in sight! • A state of the economy with large numbers of people out of work • acute shortages • excess capacity in manufacturing plants • Decline in price and profit

  6. Trough • Definition: The turnaround point where real GPD stops negative growth & once again begins positive growth • The official end of contraction, recession, depression • An expansion and recovery is expected • And the Business Cycle repeats….

  7. Take a Look @ What is Happening

  8. Causes • Capital Expenditures: • expectation of future sales to be high which increase the investments in capital goods ( ex. companies build new plants, equipment etc.) • When expectations negative, businesses pull back on their capital investments which causes layoffs in industries and result in recession

  9. Causes • Inventory Adjustment: • Changes in level of business inventories. Cut back on inventories when an economic slowdown expected • Extra inventory ordered when economic expansion expected Innovation and Imitation: • Innovation happens when a new product/new techniques enables the cost to go down and profit to go up • Imitation happens when competitor must copy the innovation causing fluctuation in investment

  10. Causes • External Shocks: Shocks such as increased oil prices, wars, and international conflict. Some shocks might drive the economy up. For example, when Great Britain discovered North Sea Oil in 1970s. Other shocks can be negative, such as when high oil prices hits the US in mid 2003.

  11. How Can Business cycles be predicted? • Use ofEconometric Model that use macroeconomic equations such as: • GDP = C+I+G + ( X-M) • Index of leading indicators, a monthly statistical series that usually turns down before real GPD turns up. Not completely reliable but allows us to know the average time between changes and see short run behavior of the economy.

  12. Where are we Currently on the business Cycles? • We are in the Phase of Expansion. • Steady recovery with decreased unemployment rate and increase in profit.

  13. How about the Rest of the world? • Sweden is in the phase of prosperity • China is in bit of contractionary phase • Britain, which is in a similar situation to the US with being in the phase of Expansion • Japan has just gone through a period of stagflation

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