Ups and Down of

Economic Activiti
Pea
Peak

R ec Pe

y
er
es s

ov
ec
ion

Trou
gh
Business Cycles
The termbusiness cycle
refers to t
recurrent ups and downs in t
of economic activity, which e
over several years.
Individual business cycles m
greatly in duration and inten
All display a set of phases.
 THE BUSINESS CY
Phases of the Business C
PEAKRECESSION
TROUGHRECOVE
Level of business activity

RO W
G E
TR

Time
 Level of business activity
PEAK H
W T
R O
G EN D
TR

Time
Peak or prosperity phase:
Real output in the economy is at a
level
Unemployment is low
Domestic output may be at its cap
Inflation may be high.
 Level of business activity
RECESSION OWTH
GR E N D
TR

Time
Contraction or recession phase:
Real output is decreasing
Unemployment rate is rising.
As contraction continues, inflation pressure fade
If the recession is prolonged, price may decline (d
The government determinant for a recession is tw
.
declining output
 Level of business activity
TROUGH
TH
R O W
G EN D
TR

Time
Trough or depression phase:
Lowest point of real GDP
Output and unemployment “bottom ou
This phase may be short-lived or prolon
There is no precise decline in output at
recession becomes a depression.
 Level of business activity
RECOVERY H
W T
R O
G EN D
TR

Time
Expansionary or recovery:
Real output in the economy is inc
Unemployment rate is declining
The upswing part of the cycle.
 Business Cycle-one cycle through 4
Real GDP
per year
Peak Peak

ry
ve
co
Re

Re
ce
ss
io
n
Trough

One cycle T
 How Indicators Monitor
Four Phases of the Business
The Leading Indicator System
… provides a basis for monitoring t
tendency to move from one phase to the
…assesses the strengths and weakn
economy
… gives clues to a quickening or slo
future rates of economic growth
… indicates the cyclical turning po
moving from the upward expansion to th
recession, and from the recession to the u
recovery.
Leading indicators anticipate the d
the economy is headed.
The coincident indicators provide info
current status of the economy
1) changing as the economy moves fro
the business cycle to the next
2) telling economists that an upturn o
economy has arrived.
Lagging indicators change months after
upturn in the economy has begun and he
economic
predict the duration of downturn
upturns.
 Based on the theory that expectatio
profits are the motivating force in th
Companies may expand product
services and investment in new str
equipment, when business executi
their sales and profits will rise.
When they believe profits will de
reduce production and investment
investmen
These actions generate the four phases of th
Causes of Fluctuations
Innovation
Political events
Random events
Wars
Level of consumer spending
Seasonal fluctuations
Cyclical Impacts — durable a
 An Actual Business
1981 - 1990
($ billion, 1992 do
Real GDP
6000 Peak

5200
Peak
4600
The Great Depression
Trough
‘80 82 ‘85 ‘90

OneCycle
 The Great Depress

The Great Depression [continued]

The Great Depression [c