*Chapter 2 Business Cycle*.
*2.1 Business cycle* is the fluctuations of economic activity, a model that clarifies the increase and
decrease in economic activity.
*Variables/activities to use to explain Business Cycle*
1. Expansion/Contaction
2. Economic growth/GDP or production
3. Business confidence/investments
4. Employment and income
5. Inflation
*There are 4 phases in the Business Cycle.*
1. Recovery - When the economy starts to increase after trough.
2. Prosperity - The economic activity is very high during this phase.
3. Recession - When the economic activity starts to decrease.
4. Depression - The economic activity is very low during this phase
*There are two periods*
1. Contraction (downswing)
- It is the period of a decrease in economic activity.
2. Expansion (upswing)
- It is a period of an increase in economic activity.
*Two points*
1. Peak - The highest point of the business cycle.
2. Trough - The lowest point of the business cycle.
*2.2 The two explanations/reasons of the Business Cycle.*
1. *Exogenous explanation*
-It argues that fluctuations of economic activity (Business cycle) develops due to forces *outside the
market system.*
-According to the monetarists the markets are *inherently stable* and external forces are the ones that
causes an increase and decrease in economic activity.
-The examples include:
•Changes in *weather conditions* like droughts and floods lead to a decrease in economic activities.
•Random shocks like *war* will lead to a very deep trough in the Business Cycle as they negatively
affect the productivity of the economy.
- It is also known as the *monetarist view* fathered by professor Milton Friedman.
2. *Endogenous explanation*
-According to this explanation the fluctuations in the businesses cycle develop due to forces *inside the
market system*.
-The Keynesians argue that the markets are *inherently unstable* in nature which means that the
market forces keeps on changing.
-The Market forces are sometimes *defective and unsynchronised* and the market does not reach its
full potential.
-The *price mechanism* is sometimes ineffective because the businesses are reluctant to reduce them
even when the supply of goods increases or becomes cheaper to produce.
-It is also known as the *Keynesian view* or interventionist approach fathered by John Maynard Keynes.
*Types of Business Cycle*
1. Kitchen cycle (1-3 years, caused djusted stock levels of the business)
2. Juggler cycle (7-11 Investments by businesses)
3. Kuznets cycle (15-20 changes in building and construction)
4. Kondratief cycle (50 year and above, major life changing events like war, discovery of diamonds, new
technology, e.t.c)
*(You have to know their period and what causes increase and decrease in economic activity in each)*
2.3 Government policy *YOU HAVE TO MASTER THIS PART FULLY TO DO WELL IN ECONOMICS* (Know
each instrument and how it is *used to influence the economy*.
*Fiscal Policy*
- It is applied by the government and it is the use of tax and government spending to influence the
economy.
*Monetary policy*
- It is applied by the SARB and it is the use of interest rate and other instruments in order to influence
the economy.
- Its instruments are:
1. Interest rate
- It is charged as a *Repo rate* by the SARB to banks as they borrow money.
2. Cash Reserve Requirements
- It is a percentage of deposits that the commercial banks must keep at the SARB.
3. Open Market Transactions
- It is the buying and selling of state securities! (Shares) by the SARB in order to influence the economy.
4. Moral Persuasion
- It is when the SARB asks the banks or the people to act in a certain manner financially in order to
influence the economy.
5. Exchange Rate Policy
- It is when the SARB deliberately devaluate(decrease) or reevaluate (increase) the value of the Rand in
order to influence the economy.
2.4 *The New Economic Paradigm* states that it is possible to have economic growth for a long time
without causing unemployment and inflation.
- On the demand side fiscal and monetary policy has to be used in such a way that people have more
money to spend on goods and services.
- On the supply is the government applying measures to ensure that businesses produce more goods
and services.
- *There is also a graph which is used to explain this theory*.
*Phillips curve* is a model that explains the relationship between unemployment and inflation. *You
have to master this through the graph*.
2.5 *Features underpinning forecasting is also a very important essay which you need to know inside
out*. The essay includes explanations of indicators, amplitude, trendline, extrapolation, moving
averages, length.
*Forecasting* is using variables in order to predict certain information into the future.
*2 Methods of forecasting*
1. Quantitative Method
- It does forecasting based on mathematical models and statistical analysis from numbers available.
- It is used when previous data is available and when forecasting is done for a short term.
2. Qualitative Method
- This method does forecasting using market research, own judgement or questionnaires.
- It is used when previous data is not available or when forecasting is done for a long term.