Transcript The Business Cycle

The Business Cycle
The Business Cycle
• Fluctuations in the market system’s economy
are called business cycles.
• They are measured by GDP.
• As we will see more in the future, interest
rates and credit expansion distort markets
Phases of the Business Cycle
• Expansion, or Recovery
• Peak (high point)
• Contraction, or Recession
– 6 months or more of decline in GDP
• Trough (low point)
Influences on the Business Cycle
• Business Investment
– investment in capital goods like new machinery
– promotes expansion; increases demand, efficiency, and
technological change
• Money and Credit
– businesses borrow more money when interest rates are
low and less when rates are high
– total output changes as availability and affordability of
credit rise and fall
• Public Expectation (expectations about future
economic conditions shape current economic
behavior)
• External Factors
– changes in the world’s economic or political climate
– examples: oil prices, war, etc.
Predicting the Business Cycle
• Businesses use predictions for plans to hire,
expand, modernize, etc.
• Gov’ts use predictions when developing
taxation and spending policies
• We use economic indicators to give us
information about the business cycle
Leading Indicators
• indicators that usually change before the economy as a whole
changes. They tell us where we are going
• they are therefore useful as short-term predictors of the economy.
• Stock market returns are a leading indicator: the stock market
usually begins to decline before the economy as a whole declines
and usually begins to improve before the general economy begins
to recover from a slump.
• Other leading indicators include the index of consumer
expectations, building permits, and the money supply.
• Complete list:
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Average weekly hours (manufacturing)
Average weekly jobless claims for unemployment insurance
Manufacturers' new orders for consumer goods/materials
Vendor performance
Manufacturers' new orders for non-defense capital goods
Building permits for new private housing units.
The Standard & Poor's 500 stock index
Money Supply (M2)
Interest rate spread (10-year Treasury vs. Federal Funds target)
Index of consumer expectations
Coincident Indicators
• they change at approximately the same time as
the whole economy, thereby providing
information about the current state of the
economy.
• tells economists what phase we’re in
– They tell us where we are at
• There are many coincident economic indicators,
such as Gross Domestic Product, industrial
production, personal income and retail sales.
• A coincident index may be used to identify, after
the fact, the dates of peaks and troughs in the
business cycle.
Lagging Indicators
• these usually change after the economy as a
whole does.
• indicate duration of phase of business cycle
– They tell us how long we are going to be there
• Typically the lag is a few quarters of a year.
• The unemployment rate is a lagging indicator
– employment tends to increase two or three quarters
after an upturn in the general economy.
• profit earned by a business is a lagging indicator
as it reflects a historical performance
• similarly, improved customer satisfaction is the
result of initiatives taken in the past.
REVIEW
A. Business Cycle
B. Contraction
C. Peak
D. Trough
E. Leading Indicators
F. Coincident
Indicators
G. Lagging Indicators
H. Recession
• Low point in the business cycle D.
• A decline in the economy for 6
months or more H.
• Indicate the duration of the phase of
the business cycle G.
• Fluctuations in the market economy A.
• indicators that usually change before
the economy as a whole changes E.
• High point in the business cycle C.
• they change at approximately the
same time as the whole economy F.
• Unemployment rate G.
• Stock Market returns E.
• GDP F.
• Personal income F.
Boom/Bust Cycle Video
• \\Atlas\vol1\home\kshook\Kirk\Classes\Econo
mics (9 wks.)\Unit III - Economic
Indicators\Boom Bust Cycle Rap Video.flv
Boom/Bust Video
• Now, read through the lyrics to the song and
answer the questions at the end