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Business Cycles

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Alex Strickland

on 6 November 2015

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Transcript of Business Cycles

the series of growing and shrinking periods of economic activity, measures by increases or decreases in real GDP
Business Cycle:
real GDP grows from a low point
period of economic growth
unemployment decreases, inflation increases
longest expansion was from 1991-2001
the point at which GDP is the highest
producers cut back, resources become less scarce and prices stabilize or fall
unemployment rises because employers produce less

Recession - a prolonged economic contraction lasting two or more quarters (six months or more)
Depression - an extended period of high unemployment and reduced business activity
final phase of the business cycle
the point at which real GDP and employment stop declining
Business Cycles
4 Stages:
1. Expansion
2. Peak
3. Contraction
4. Trough
as demand for goods and services increase, more resources are needed
as resources become scarce, their prices rise
as prices rise and resources become more scarce, businesses become less profitable

from this point on, real GDP declines
Although prices usually remain the same or decrease during this phase, sometimes they go up...

these periods are called stagflation - stagnation in business activity and inflation of prices
* a business cycle is complete when it has gone through all 4 phases
Why do business cycles occur?
1. Decisions made by businesses
2. Changes in interest rates
3. Expectations of consumers
4. External shocks to the economy
*these things cause a
ripple effect
1. Business Decisions:

a) Demand Slump
when businesses decide to decrease or increase production
the ripple effect
decrease in employees/reduce hours worked

- cut back investment of new manufacturing equipment, which will affect the demand of machinery thus affecting the production of machinery, then affecting musicians

*a contraction could result
b) New Technology
adopt new technology that greatly reduces production cost
supply increases, cost of production decreases
more jobs available
people who use the product will have it more readily available

*an expansion could possibly happen
2. Changes in Interest Rates
rising interest rates can be more costly for consumers to borrow money to make purchases
aggregate demand - promotes contraction in the economy
aggregate demand - promotes expansion in the economy
3. Consumer Expectation
how consumers feel about prices, business activity, and job prospects
which influences their economic choices -- creating changes in aggregate demand
Predicting Business Cycles
Leading Indicators
- measures of economic performance that usually change before real GDP changes
Coincident Indicators
- measures of economic performance that usually change at the same time as real GDP changes
Lagging Indicators
- measures of economic performance that usually change after real GDP changes
4. External Issues
factors such as natural disasters
ex. Hurricane Katrina damaged oil refineries, oil wells, & offshore oil platforms -- thus impacting oil prices
* increase in prices - result in economic contraction
Full transcript