The Business Cycle

 The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time.

The Business Cycle  The natural fluctuation of the economy between periods of expansion (growth) and recession (contraction).  Factors such as gross domestic product (GDP), interest rates, levels of employment and consumer spending can help to determine the current stage of the economic cycle.

fig O National output Time Potential output Actual output The business cycle  At one time, business cycles were thought to be extremely regular, with predictable durations, but today they are widely believed to be irregular, varying in frequency, magnitude and duration

Business Cycle Indicators  Composite of leading, lagging and coincident indexes and used to forecast changes in the direction of the overall economy of a country.  They can be used to confirm or predict the peaks and troughs of the business cycle.

Leading Indicators o A leading indicator is one that changes before the economy does. o generally use to predict a new phase of the business cycle. o Example:Bond yields, the index of consumer expectations, building permits, money supply

Lagging Indicators  is one that changes after the economy has changed. Examples: 1.Profit earned by a business; 2.The average duration of unemployment; 3.The value of outstanding commercial and industrial loans; 4.The change in the Consumer Price Index for services; 5.The change in labor cost per unit of output.

Coincident Indicators o that changes concurrently with the economy. Еxamples:  Nonagricultural employment;  Manufacturing and trade sales;  Personal income and industrial production.

Phases of the Business Cycle

Trough  The stage of the economy's business cycle that marks the end of a period of declining business activity and the transition to expansion. The business cycle is said to go through recovery (expansion), then the peak, followed by recession (contraction), and then it finally bottoms out with the trough.

Recovery (Expansion)  The phase of the business cycle when the economy moves from a trough to a peak. It is a period when business activity surges and gross domestic product expands until it reaches a peak. Also known as an "expansion".

Peak  The highest point between the end of an economic expansion and the start of a contraction in a business cycle.  Key economic indicators, such as employment and new housing starts, begin to fall. It is at this point that real GDP spending in an economy is its highest level.

Characteristics of the Peak  Businesses produce more goods  Businesses invest in more machinery  Consumers spend more money.  Less money is spent by the Government on unemployment benefits  More money is collected by the Government in income tax and VAT o Prices tend to increase due to extra demand.

Recession (Contraction)  A phase of the business cycle in which the economy as a whole is in decline More specifically, contraction occurs after the business cycle peaks, but before it becomes a trough.

Characteristics of Recession  Businesses cut back on production  - Some businesses may go bankrupt  - Consumers spend less money.  - Individuals may lose their jobs  - More money is spent by the Govt on unemployment benefits  - Less money is collected by the Govt in income tax and VAT  - Prices start to fall.

Characteristics of Recession  A period where economic growth slows down and the level of output may actually decrease. Unemployment is likely to increase. Firms may lose confidence and reduce investment. Individuals may save rather than spend.

 Since the World War II, most business cycles have lasted three to five years from peak to peak. The average duration of an expansion is 44.8 months and the average duration of a recession is 11 months.  As a comparison, the Great Depression - which saw a decline in economic activity from 1929 to lasted 43 months.

in Paris – in Paris doctor and statistician.  In 1860, French economist Clement Juglar identified the 7 to 11 years long fixed investment cycle. Clement Juglar

Joseph Kitchin (1861 – 1932) was a British businessman and statistician  Kitchin cycle is a short business cycle of about 40 months discovered in the 1920s.

Nikolay Kondratieff – Long waves are described as regular, sinusoidal-like cycles in the modern (capitalist) world economy. Kondratieff identified three phases in the cycle: expansion, stagnation, recession. More common today is the division into four periods with a turning point (collapse) between the first and second phases.

 Writing in the 1920s, Kondratieff proposed to apply the theory to the 19th century:  1790 – 1849 with a turning point in  1850 – 1896 with a turning point in  Kondratieff supposed that in 1896, a new cycle had started. Nikolay Kondratieff

Kondratieff`s Cycles

Joseph Alois Schumpeter –  Schumpeter suggested a model in which the four main cycles,Kondratieff (54 years), Kuznets (18 years), Juglar (9 years) and Kitchin (about 4 years) can be added together to form a composite waveform.

Robert M. Solow ( )   He was awarded the 1987 Nobel Memorial Prize in Economic Sciences. Bill Clinton awarding Solow The National Medal of Science (1999)

The Contribution of….  Vasily Leontieff  Finn E. Kidland and Edward C.Prescott  Robert Lucas  Ludwig von Mises  Friedrich von Hayek  …………………… to the theory of economic cycles.