Transcript The Business Cycle

The Business Cycle
TRE TIPTON
Define Business Cycle:
 The periodic but irregular up and down movements
in economic activity, measured by fluctuations in
real GDP and other macroeconomic variables
(Parkin and Bade: Economics)
History
 Jean Charles Leonard de Sismondi: 1819 wrote
Nouveaux Principes d’economie politique in
opposition to the prior theory of economic
equilibrium
 Despite being called a cycle, the fluctuations in
economic activity do not follow a mechanical or
predictable pattern
Theories
 Keynesian: fluctuations in aggregate demand cause
the economy to come to short run equillibrium at
levels that are different from the full employment
rate of output
 Keynesian models do not necessarily imply peiodic
business cycles. However they involve the interaction
of Keynesian multiplier and accelerator or responses
to initial shocks
Keynesian Model
 Richard Goodwin a proponent of Keynesian theory
believes the business cycle is dependent on
employment cycles. As the economy is at high
employment workers demand rises in wages, and
when the economy is at low employment workers
wages tend to fall
 When unemployment and business profits rise, the
output rises
Credit/ Debt Cycle
 Credit cycle: the net expansion of credit (increase in
private credit, equivalently debt, as a percent of
GDP) yields economic expansions, while the net
contraction causes recessions and maybe even
depressions
 In an expansion period, interest rates are low and
companies easily borrow money from banks to
invest. Banks easily grant loans because expanding
economic activity makes business increase cash flow
and therefore will be able to pay back loans
Credit/ Debt cont’d
 This process leads to firms becoming excessively
indebted, so that they stop investing, or giving out
loans, and the economy goes into recession
 Similar to America’s recent recession where banks
handed out mortgages like candy, and when people
were not able to pay back their loans banks went
bankrupt
Politically-based Business Cycle
 The partisan business cycle suggests: cycles are
caused from succeeding elections of Parties who
differ in policy.
 Party A for example, inputs expansionary policies,
causing growth and inflation until voted out of office
when inflation is too much
 Party B then changes policy and adopts more
conservative or contractionary methods reducing
inflation and growth but then unemployment gets to
high and then is again replaced by Party A
Marxist Economics
 Marx believes the economy is based on production of
commodities to be sold in the market is intrinsically
prone to crisis
 Profit is the major engine of the market economy but
as capital has a tendency to fall it repeatedly creates
crises where mass unemployment occurs and
businesses fail
My Theory
 In America specifically, looking at our current state
of recession, I believe the Credit/Debt theory is the
most correct in terms of our Business Cycle
 If you consider the recession, which is a result of
much of the excessive investing of banks, you’ll see
the relation between the Credit/Debt theory
My Theory
 Many banks were handing out loans to people who in
actuality may have not been qualified, and when these
people had to foreclose their homes, the banks would not
get paid back on their investment, and after a widespread
trend of this banks began to go broke
 I also believe the Political theory has some significance
because as presidents change as do the policies we
practice. This could create confusion and distortion
amongst our economy as previous motives are now
replaced by new and opposite motives
 Overall, I believe the Credit/Debt and Political theories
best explain the reasons for business cycles