Objectives 1. What are the 4 phases of the business cycle? 2.What factors influence the business cycle? 3. What are the 3 leading indicators used to determine the current phase of the business cycle and predict where the economy is headed? 4. Terms: business cycle, expansion, peak, contraction, trough, recession, leading indicators, coincident indicators, lagging indicators. 5. Define/compare/contrast terms; extrapolate current conditions into the future of economy.

Review GDP Define GDP---- Why do you only count the “final” value of goods and services? Why do you not count the value of goods or services produced in a previous year? Define “durable” and “non-durable” goods--

Business Cycles Business Cycles--are fluctuations, or changes, in a market systems’ economic activity. These changes are measured by increases or decreases in real GDP. Characterized by periods of economic growth followed by periods of economic decline.

Business Cycles While the cycle of up and downs is consistent, the severity and the length of time they last does not.

Phases of a Business Cycle Business Cycle Phases: Expansion or recovery Peak Contraction or recession Trough

Business Cycle Phases Expansion—A period of economic expansion and growth. Peak—A high point at which the economy is at its strongest and most prosperous.

Business Cycle Phases, cont’d Contraction—When real GDP enters a period of business slowdown. Recession—a decline in real GDP for two or more consecutive quarters. Depression—are prolonged and severe recessions. Trough—The final stage in the business cycle; demand, production, and employment reach their lowest levels

Business Cycles Diagram

Business Cycles Influences on the Business Cycle: Business investment—High levels promote expansion; low levels contribute to contractions. Interest rates and credit—When interest rates are low, businesses and individuals generally borrow more money. (Inverse is also true).

Influences on business cycle Consumer Expectations—If consumers think the economy is heading toward recession, then they will limit their spending. External Factors / Shocks —World economic and political climate affect the business cycle in the U.S. High oil prices of 1973, 1984. War affects the business cycle.

Predicting the Business Cycle 3 Types of Economic Indicators: Leading indicators—(Anticipate)changes in building permits, prices of raw materials, stock market Coincident indicators—Personal income, sales volume, industrial production. Lagging Indicators –Changes months after an upturn or downturn Ex. Business profits, unemployment.

Economic Conditions The best…and the worst Economic Growth: ideal economic condition where there is steady long-term growth in GDP, low levels of unemployment, and businesses are prospering. Stagflation: Unusual (economists thought impossible before the 1970’s) and destructive economic condition where there is high inflation, high unemployment, and declining output.

Markets Experience Fluctuations Retail sales are highest in December Construction tends to increase in the Spring. Furniture sales tend to peak in the fall. Data is adjusted for seasonal fluctuations How did this December compare to last December sales? Etc.