Macroeconomics
6 Business Cycles & Growth
Changes in the economy often follow a typical pattern, though where we are
on in that pattern is hard to tell while it is happening.
This section corresponds to Chapter 12: Sections 2 & 3.
OBJECTIVES
60. Describe the phases of the business cycle
61. Discuss aggregate demand and aggregate supply.
62. Identify the causes of the changes in the business cycle and how
economists predict those changes.
63. Analyze the causes and measures of economic growth.
LX. The four phases of the business cycle
 KEY CONCEPTS
o Business cycle—series of periods of expanding and
contracting activity, measured by increases or decreases in
real GDP.
o Recession—contraction lasting two or more quarters.
o Depression—long period of high unemployment, slow
business activity.
o Stagflation—stagnation in business activity with inflation of
prices.
A. Stage 1: ★
1. Expansion is period of economic growth—an increase in real
GDP—growing from a low point, or trough.
2. Jobs easier to find; unemployment drops.
3. More resources needed to keep up with spending demand.
4. As resources become scarce, their prices rise.
B. Stage 2: ★
1. Peak is point at which real GDP is highest
2. As prices rise and resources tighten, businesses become less
profitable; businesses cut back production, and real GDP drops.
C. Stage 3: ★
1. During contraction, producers cut back and unemployment
increases.
2. Resources become less scarce, so prices tend to stabilize or
fall.
D. Stage 4: ★
1. Trough is point at which real GDP and employment stop
declining.
2. A business cycle is complete when it has gone through all four
phases.
LXI. Aggregate Demand and Supply
A. Aggregate Demand—total amount of products that might be bought
at every level
1. It includes all goods and services, ★
2. Aggregate demand curve is downward sloping
a. vertical axis shows average price of all goods and
services
b. horizontal axis shows the economy’s total output
B. Aggregate Supply—sum of all goods and services that might be
provided at every price level
1. Aggregate supply curve almost horizontal when real GDP is
low, as businesses do not raise prices when economy is weak.
2. Curve slopes upward as prices increase with rise in real GDP
3. Curve almost vertical with inflation—no rise in real GDP
C. Macroeconomic Equilibrium—when aggregate demand equals
aggregate supply.
1. aggregate demand curve intersects aggregate supply curve
2. increase in aggregate demand shifts AD curve to right
3. decrease in aggregate supply shifts AS curve to left
LXII. Changes in the Cycle
A. Why Do Business Cycles Occur?
1. Factor 1: Business Decisions
a. Decisions by businesses affect suppliers and related
businesses
b. If enough make similar decisions, ★
c. Demand slump can lead to decreased production, lay
offs—contraction
d. New technology can raise productivity, demand,
employment—expansion
2. Factor 2: Changes in Interest Rates
a. Rising interest rates make borrowing costly, ★
b. Decrease household purchases and business investment
in capital goods promotes contraction
c. Low rates increase home sales—more people qualify for
mortgage
d. related economic activities increase and economy
expands
3. Factor 3: Consumer Expectations
a. Consumers’ ideas on prices, business activity, jobs
influence choices and can change aggregate demand
b. confident consumers tend to consume more, ★
c. Consumer Confidence Survey report published monthly
4. Factor 4: External Issues
a. A nation’s economy can be influenced by events beyond
its control
b. Natural disasters can damage capital, infrastructure
c. Conflicts overseas and political decisions made by other
countries
B. Predicting Business Cycles
1. Economic indicators—measures for predicting changes in
business cycle
help businesses and government make informed choices
2. Leading indicators—measures that usually change before real
GDP
3. Coincident indicators—measures that usually change at same
time as real GDP
4. Lagging indicators—measures that usually change after real
GDP
LXIII. Economic Growth
A. What Is Economic Growth?
1. Gauging Economic Growth
a. Early theories held that economic growth resulted from:
collecting high taxes from growing population, and
exporting more than importing. Adam Smith argued
“wealth of nations” came from productive capacities.
b. Best measure of growth is increase in real GDP. The rate
of real GDP change is good indicator ★
2. Population and Economic Growth
a. Population influences economic growth
b. If population grows faster than real GDP, growth may
mean more workers
c. Real GDP per capita—real GDP divided by total
population. Real GDP per capita is measure of standard of
living. Everyone does not actually have that amount; does
not measure quality of life.
B. What Determines Economic Growth?
1. Factor 1: ★
a. Access to natural resources is important: arable land,
water, forests, oil, mineral resources.
b. Resources not enough; also need free market, effective
government
2. Factor 2: ★
a. Labor input—size of labor force multiplied by length of
work week
b. Population growth made up for shorter work week since
early 1900s
c. More important than size of labor force is its level of
human capital
3. Factor 3: ★
a. More and better capital goods increase output; more
and better machines can produce more goods.
b. Capital deepening—increase in the capital to labor ratio,
providing more and better equipment to each worker
increases production
4. Factor 4: ★
a. Technology, innovation make efficient use of resources,
raise output
b. Innovations can increase economic growth
C. Productivity and Economic Growth
1. Productivity—amount of output produced from a set amount
of inputs
a. labor productivity: amount of goods and services
produced by one worker in an hour
b. capital productivity: amount produced by set amount of
equipment and materials
2. How Is Productivity Measured?
a. For a business, compare amount of capital and work
hours to total output
b. Multifactor productivity—★
c. Ratio between economic output and labor and capital
inputs used
d. Multifactor productivity data compiled for major
industries, sectors are used to estimate productivity of
entire economy.
3. What Contributes to Productivity?
a. Quality of labor—educated, healthy workforce is more
productive
b. Technological innovation—new technology helps
increase output
c. Energy costs—cheaper power lowers cost of using tools
d. Financial markets—banks, stock markets flow funds
where needed
4. How Are Productivity and Growth Related?
a. Economic growth is a measure of a change in production
b. Productivity ★
c. Economy can grow by increasing quantity of resources,
labor, capital, or technology—or by increasing productivity.