BUSINESS CYCLE
GROSS DOMESTIC PRODUCT(GDP)
The total value of all final goods and services produced within the nation each year
WHAT DOES THE GDP TELL US?
• If the GDP is larger than last year, the economy is expanding (getting bigger)
• If the GDP is smaller, the economy is shrinking (getting smaller)
• The Business Cycle allows people to understand the direction the economy (GDP) is going
(growing or shrinking) and plan accordingly.
IMPORTANT TERMS
ECONOMIC GROWTH
Increase in the production of goods and services compared over a period.
INFLATION
Inflation is a period in which there is an increase in prices of goods and services
DEFLATION
Deflation is a period in which there is a decrease in prices of goods and services
BUSINESS CYCLE
The business is defined as the downward and upward fluctuations of
Gross Domestic Product (GDP) over a period of time.
IMPORTANCE / NEED FOR BUSINESS CYCLE
• Useful tool for analysing the economy
• For decision making for the businesses
• Appropriate Policy making for the Government
• It can also help you make better financial decisions.
THREE ECONOMIC GOALS
1. Promote economic growth
2. Prevent excessive unemployment
3. Keep prices stable by limiting inflation
PHASES OF BUSINESS CYCLE
Expansion (Growth)
Peak (Top/Boom)
Contraction (Shrinking/Recession)
Trough (Bottom/ Slump)
BUSINESS CYCLE
EXPANSION
DURING A PERIOD OF EXPANSION
• Wages increase
• Low unemployment
• People are optimistic and spending money
• High demand for goods
• Businesses start
• Easy to get a bank loan
• Businesses make profits and stock prices increase
PEAK / BOOM
WHEN THE ECONOMIC CYCLE PEAKS:
• The economy stops growing (reached the top)
• GDP reaches maximum
• Businesses can’t produce any more or hire more people
• Cycle begins to contract
CONTRACTION
DURING A PERIOD OF CONTRACTION
• Businesses cut back production and layoff people
• Unemployment increases
• Number of jobs decline
• People are pessimistic (negative) and stop spending money
• Banks stop lending money
TROUGH / SLUMP
WHEN THE ECONOMIC CYCLE REACHES A TROUGH:
• Economy “bottoms-out” (reaches lowest point)
• High unemployment and low spending
• Stock prices drop
QUICK REVIEW!
• What phase of the business cycle do wages go up?
(Unemployment is depleting)
• What phase of the business cycle do wages go down?
(Unemployment is rising)
• When are wages at their highest?
• When are wages at their lowest?
• When will unemployment be at its lowest?
• When will business profits be the highest?
• When should you look for a new job?
THANK YOU