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Transcript of Business Cycle
GDP The total value of all final goods and services produced in a particular economy; the dollar value During the contraction phase, GDP is always falling. But other conditions, such as price levels and unemployment, may vary. Economists with different characteristics and levels of severity. Recession Depression Stagflation If real GDP falls for two consecutive quarters (six straight months), the economy is said to be in a recession, or a prolonged economic contraction. If a recession is especially long and severe, it may be called a depression. Deep Depressions usually feature high unemployment and low factory output A decline in real GDP combined with a rise in a price level. 4 Economic Variables
1. Business Investment
2. Interest Rates and Credit
3. Consumer Expectations
4. External Shocks When the economy is expanding firms expect sales and profits to keep rising. Therefore, they may invest in the expansion of old plants in order to increase the plants productivity and capacity. This creates jobs and helps increase GDP and maintain expansion.
But at somepoint firms decide they have expanded enough or that demand for their product has dropped, therefore raising unemployment by laying off workers and slowing production. some firms may follow suit and bring the economy into a recession. Credit Interest Rate When credit is used consumers are charged and interest rate. As interest rates rise, investment dries us, as does job growth. Less investment means less output and employment.
As interest rates lower, companies borrow money to make new investments which leads to jobs in the economy Fall Rise Consumer Expectations Consumers have greater control over the economy than they probably expect: If consumers expect a downturn then they might spend less in order to save for job loss or lowered income, therefore, sending us into a contraction If the economy is expected to to grow then consumers may buy more goods and services, therefore, pushing the GDP up. Negative External Shocks:
Wars Interrupt the Normal Trade Relations
Droughts that Severely Reduce Crop Harvest
GDP Declines and the Price Level Rises.
Positive External Shocks:
Discovery of Large Deposits of Oil
AS Curve Shifts to the Right Which Increases the GDP