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The Business Cycle
Transcript of The Business Cycle
During this phase the economy is growing measured by the rise of GDP(Gross Domestic Product). The economy has many available jobs and falling unemployment.
Peak: During this phase the GDP stops growing and expansion is at its height.
Contraction: During the phase the economy is declining after its peak, GDP is falling while unemployment is starting to rise.
Trough: This phase occurs when the economy has reached the lowest point of an economic contraction. GDP stops falling.
Phases in the Business Cycle
Recession: Recession occurs if GDP continues to fall for a 6 to 18 month period. Also known as a prolonged contraction, meaning unemployment has continued to rise.
Depression: Occurs if recession is long or severe. Unemployment is continuing to rise.
Staglfation: Unmoving or decaying economy. Decline in GDP combined with prices rising. This phase can also be known as inflation.
Insourcing and Outsourcing
Insourcing: The practice of using an organizations own personnel or other resources to accomplish a task.
Outsourcing: Obtaining goods or services from an outside supplier or provider in place of an internal source.
How do insourcing and outsourcing affect the business cycle?
Successful insourcing can cause the economy and the business cycle to shift. If a business is insourcing, economic lows known as troughs in the business cycle are typically avoided. Insourcing also provides jobs within a company which causes unemployment rates to fall.
Outsourcing also has a well balanced affect on the business cycle as well. Outsourcing can also lead to grown and new jobs which help the market grow. However outsourcing can also have negative affects. Unfortunately it sometimes increase the decline in the contraction phase. Outsourcing can also cause a growth in unemployment and job loss.
Cost-Push Inflation and Demand-Pull Inflation
Cost-Push Inflation: Theory that inflation occurs when producers raise prices in order to meet increased costs.
Demand-Pull Inflation: Theory that inflation occurs when demand for goods and services exceeds existing supplies.
How do Cost-Push inflation and Demand-Pull Inflation influence the business cycle?
Demand-Pull Inflation influences expansion because wages are rising with the demand for labor and goods, meaning unemployment continues to fall. Cost-Push Inflation influences the business cycle due to the fact that as companies increase prices, they also have to increase employee wages in order for people to afford what they are buying.
How does unemployment affect the business cycle?
As the economy grows or expands, businesses are more willing to hire employees meaning unemployment will begin to fall this occurs during the business cycle phase expansion. Unfortunately when the economy begins to contract or shrink, companies begin to see decrease in revenue and sometimes have to lay off their employees. This occurs during a contraction in the business cycle. During this phase in the cycle, unemployment begins to rise.
How does GDP affect the business cycle?
GDP or Gross Domestic Product is the total value of goods produced and services provided in a country during one year.
During an economic contraction demand for products and services decline, meaning an increase in costs. Because demand and products are decreasing, GDP also decreases.
During the trough phase of the business cycle, the GDP is still decreasing but is still also positive.
During the next phase, expansion, the economy is recovering which means GDP is increasing.
When the economy is in the peak phase of the business cycle, GDP is also increasing.
Monetary Policy and Fiscal Policy
Monetary policies are usually equipped by a central bank, where as fiscal policy decisions are set by the national government.
Inside Lag vs. Outside Lag
Inside lag is the time it takes to pass a policy where as outside lag is the time it takes to go into affect. The government or central banks implement these. They can both reduce the effectiveness of the business cycle and can destabilize the economy.
Basic Principles of a Free Enterprise Economy
Profit motive, open opportunity, legal equality, private property rights, free contract, voluntary exchange and competition.
The Free Enterprise Economy is responsible for the business cycle. One of the goals of the economy is for everyone to be employed, this would end contractions in the business cycle. If everyone was employed the economy would be at the expansion stage at all times because more jobs would become available more often.
What are the 4 economic variables that affect the business cycle?
4. Taxes and Interest Rates
Four key economic systems around the world today
1. Traditional Economy
2. Command Economy
3. Market Economy
4. Mixed Economy
How does the Circular Flow work?
The circular flow map shows the independence of an economy. The diagrams key components are Business, Household, Resource Market and Product Market.
What type of economic system does the United States have today?