Transcript The Business Cycle

The Business Cycle
19.01.2010
The Business Cycle

The recurring and fluctuating
levels of economic activity that
an economy experiences over a
long period of time.
The Business Cycle
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The natural fluctuation of the economy
between periods of expansion
(growth) and recession (contraction) .
Factors such as gross domestic product
(GDP), interest rates, levels of employment
and consumer spending can help to
determine the current stage of
the economic cycle.
Potential output
The business cycle
3
National output
3
2
4
2
O
4
Actual
output
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1
Time
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At one time, business cycles were thought
to be extremely regular, with predictable
durations, but today they are
widely believed to be irregular, varying in
frequency, magnitude and duration.
fig
Business Cycle Indicators
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Composite of leading, lagging
and coincident indexes and used
to forecast changes in the
direction of the overall economy
of a country.
They can be used to confirm or
predict the peaks and troughs
of the business cycle.
Leading Indicators
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o
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A leading indicator is one that
changes before the economy does.
generally use to predict a new
phase of the business cycle.
Example:Bond yields, the index
of consumer expectations,
building permits, money supply
Lagging Indicators
is one that changes after the economy has
changed.
Examples:
1.Profit earned by a business;
2.The average duration of unemployment;
3.The value of outstanding commercial and
industrial loans;
4.The change in the Consumer Price Index for
services;
5.The change in labor cost per unit of output.

Coincident Indicators
that changes concurrently with
the economy.
Еxamples:
 Nonagricultural employment;
 Manufacturing and trade sales;
 Personal income and industrial
production.
o
Phases of the Business Cycle
Trough

The stage of the economy's business
cycle that marks the end of a period of
declining business activity and the
transition to expansion.
The business cycle is said
to go through recovery
(expansion),
then the peak,
followed by recession
(contraction),
and then it finally bottoms
out with the trough.
Recovery (Expansion)

The phase of the business
cycle when the economy moves from
a trough to a peak. It is a period
when business activity surges and
gross domestic product expands
until it reaches a peak.
Also known as an
"expansion".
Peak
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The highest point between the end of an
economic expansion and the start of a
contraction in a business cycle.
Key economic indicators, such as
employment and new housing starts, begin
to fall. It is at this point that real GDP
spending in an economy is its
highest level.
Characteristics of the Peak
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o
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Businesses produce more goods
Businesses invest in more machinery
Consumers spend more money.
Less money is spent by the Government
on unemployment benefits
More money is collected by the
Government in income tax and VAT
Prices tend to increase due to extra
demand
Recession (Contraction)

A phase of the business cycle in which the
economy as a whole is in decline
More specifically,
contraction occurs
after the business cycle peaks,
but before it becomes a trough.
Characteristics of Recession
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Businesses cut back on production
- Some businesses may go bankrupt
- Consumers spend less money.
- Individuals may lose their jobs
- More money is spent by the Govt on
unemployment benefits
- Less money is collected by the Govt in
income tax and VAT
- Prices start to fall.
Characteristics of Recession

A period where economic growth
slows down and the level of output
may actually decrease.
Unemployment is likely to increase.
Firms may lose confidence and
reduce investment.
Individuals may save rather than
spend.
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Since the World War II, most business
cycles have lasted three to five years
from peak to peak. The average
duration of an expansion is 44.8
months and the average duration of a
recession is 11 months.
As a comparison, the Great
Depression - which saw a decline in
economic activity from 1929 to 1933 lasted 43 months.
15.10.1819 in Paris –
28.02.1905 in Paris
doctor and statistician.

In 1860, French economist
Clement Juglar
Clement Juglar identified the
7 to 11 years long fixed investment
cycle.
Joseph Kitchin (1861 – 1932) was a
British businessman and statistician

Kitchin cycle is a short business
cycle of about 40 months
discovered in the 1920s.
Nikolay Kondratieff
4.04.1892 – 17.09.1938
Long waves are described as regular,
sinusoidal-like cycles in the modern (capitalist)
world economy.
Kondratieff identified three phases in the cycle:
expansion, stagnation, recession.
More common today is the division into four
periods with a turning point (collapse) between
the first and second phases.
Nikolay Kondratieff
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Writing in the 1920s, Kondratieff
proposed to apply the theory to the 19th
century:
1790 – 1849 with a turning point in
1815.
1850 – 1896 with a turning point in
1873.
Kondratieff supposed that in 1896, a new
cycle had started.
Kondratieff`s Cycles
Kondratieff`s Cycles
Joseph Alois Schumpeter
8.02.1883 – 8.01.1950
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Schumpeter suggested a model in
which the four main cycles,Kondratieff
(54 years), Kuznets (18 years), Juglar
(9 years) and Kitchin (about 4 years)
can be added together to form a
composite waveform.
Robert M. Solow (23.08.1923)
He was awarded the 1987 Nobel
Memorial Prize in Economic Sciences.
Bill Clinton awarding Solow
The National Medal of Science (1999)
The Contribution of….
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Vasily Leontieff
Finn E. Kidland and Edward C.Prescott
Robert Lucas
Ludwig von Mises
Friedrich von Hayek
……………………
to the theory of economic cycles.