Business Cycles
√ The term business cycle refers
to the recurrent ups and downs in the
level of economic activity, which
extend over several years.
√ Individual business cycles may
vary greatly in duration and intensity.
√ All display a set of phases.
THE BUSINESS CYCLE
Phases of the Business Cycle
RECESSION
TROUGH
RECOVERY
Level of business activity
PEAK
Time
Level of business activity
PEAK
Time
√ Peak or prosperity phase:
 Real output in the economy is at a
high level
 Unemployment is low
 Domestic output may be at its
capacity
 Inflation may be high.
Level of business activity
RECESSION
Time
√ Contraction or recession phase:
 Real output is decreasing
 Unemployment rate is rising.
As contraction continues, inflation pressure fades.
 If the recession is prolonged, price may decline (deflation)
The government determinant for a recession is two
consecutive quarters of declining output.
Level of business activity
TROUGH
Time
√ Trough or depression phase:
 Lowest point of real GDP
 Output and unemployment “bottom out”
 This phase may be short-lived or prolonged
 There is no precise decline in output at which a
serious recession becomes a depression.
Level of business activity
RECOVERY
Time
√ Expansionary or recovery:
 Real output in the economy is increasing
 Unemployment rate is declining
 The upswing part of the cycle.
Real GDP
per year
Business Cycle-one cycle through 4 phases
Peak
Peak
Trough
One cycle
Time
Recessions since 1950 show that duration and
depth are varied:
Period
1953-54
1957-58
1960-61
1969-70
1973-75
1980
1981-82
1990-91
2001
Duration in months
10
8
10
11
16
6
16
8
8
Depth
(decline in real GDP)
— 3.0%
— 3.5%
— 1.0%
— 1.1%
— 4.3%
— 3.4%
— 2.6%
— 2.6%
app. —3.3%
How Indicators Monitor the
Four Phases of the Business Cycle
• The Leading Indicator System
… provides a basis for monitoring the
tendency to move from one phase to the next.
…assesses the strengths and weaknesses in the
economy
… gives clues to a quickening or slowing of
future rates of economic growth
… indicates the cyclical turning points in
moving from the upward expansion to the downward
recession, and from the recession to the upward
recovery.
 Leading indicators anticipate the direction in which
the economy is headed.
 The coincident indicators provide information
about the current status of the economy
1) changing as the economy moves from one
phase of the business cycle to the next
2) telling economists that an upturn or downturn
in the economy has arrived.
 Lagging indicators change months after a downturn
or upturn in the economy has begun and help
economists predict the duration of economic
downturns or upturns.
Based on the theory that expectations of future
profits are the motivating force in the economy.
Companies may expand production of goods and
services and investment in new structures and
equipment,when business executives believe that
their sales and profits will rise.
When they believe profits will decline, they reduce
production and investment.
These actions generate the four phases of the
business cycle.
Causes of Fluctuations
Innovation
Political events
Random events
Wars
Level of consumer spending
Seasonal fluctuations
Cyclical Impacts — durable and non durable
An Actual Business Cycle
1981 - 1990 ($ billion, 1992 dollars)
Real GDP
Peak
6000
5200
Peak
4600
Trough
‘80
82
‘85
One Cycle
‘90
The Great Depression
The Great Depression [continued]
Great Depression Stats
Global Depression, 1929-1932
Ave. Unemployment Rate, 1925-1928
Ave. Unemployment Rate, 1929-1933
Percent Decrease in Prices, 1929-1932
Six Million “Rosie the Riveters”
World War II Production of these items brought us out
of the Great Depression.
300,000 warplanes
124,000 ships
289,000 combat vehicles and tanks
36 billion yards of cotton goods
41 billion rounds of ammunition
2.4 million military trucks
111,527 tank guns and howitzers
•$288 billion was spent on the war,
•$100 billion in the first six months.
Unemployment hit an all-time low of 1.2%
and personal savings were 25.5%.