Models of economic cycle Types of economic cycles What is economic cycle? Models of economic cycle Types of economic cycles Measures of economic cycle Government policy against recessions

Economic cycle The economic cycle is the natural fluctuation of the economy between periods of expansion (growth) and contraction (recession). 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. During times of expansion, investors seek to purchase companies in technology, capital goods and basic energy, and during times of contraction, investors look to purchase companies such as utilities, financials and healthcare.

Models of economic cycle An economic cycle, also referred to as the business cycle, has four stages: expansion, peak, contraction and trough. During the expansion phase, the economy experiences relatively rapid growth, interest rates tend to be low, production increases and inflationary pressures build. The peak of a cycle is reached when growth hits its maximum output. Peak growth typically creates some imbalances in the economy that need to be corrected. This correction occurs through a period of contraction when growth slows, employment falls and prices stagnate. The trough of the cycle is reached when the economy hits a low point in growth from which a recovery can begin.

4 – phase model GDP А2 А1 А В В I II III IV Time cycle

2 – phase model F GDP trend B E H I C A G D I II Time cycle

Models of economic cycle

Chronology of economic cycles 1st crisis was registered in 1825 in Great Britain, And in 1873-1878 was marked the 1st world economic crisis

World crisis of 1929-1933 (named Great Depression) The production volume of leading countries (USA, Great Britain and Germany)  for 46% International trade balance of these countries  for 67% Number of unemployed = 26 million people (every one per four person) Real income of population  for 58%.

Production of basic materials at 1929, 1932 годах, million tons Germany Great Britain USA 1929 1932 Cast iron 13,2 3,9 7,7 3,6 44,2 8,9 Steel 16,0 5,6 9,8 5,3 57,3 13,8 Cement 7,0 2,8 4,8 4,3 29,5

Main reasons of economic cycles external internal mixed (synthetic)

External reasons Are out of the economic mechanisms and include such factors as wars, revolutions, changes in political power, natural/man-made catastrophes (drought, floodwaters, fires, earthquake, etc), some exotic reasons as the sunspots

Sunspots and the business activities William Stanley Jevons presented a statistical study relating business cycles with sunspots. His reasoning was that sunspots affected the weather, which, in turn, affected crops. Crop changes could then be expected to cause economic changes.

Internal reasons Are the result of factors of economic system and its’ processes, such as: changes in consumption, investments, state economic policy. One of the most strong factors is the period of capital renovation

Government is thought to be external factor. Mixed reasons the external factor initiate the process, and its development is provided by economic mechanisms of the system, so the 1st impulse produces internal cyclic fluctuations. Government is thought to be external factor.

Economic cycles classifications In recent days are known more than 1380 types of economic cycles. The most appropriate are described below

Types of economic cycles Period The main features Kitchin inventory cycle  2-4 years A short business cycle because of difference in time periods needed for reaction of the economic agents for changes in market situation (so-called overproduction cycle) Juglar fixed-investment cycle 7-12 years Oscillations of investments into fixed capital and not just changes in the level of employment of the fixed capital (and respective changes in inventories) Kuznets swing (infra-structural investment) 16-25 years Connected with demographic processes, in particular with immigrant inflows/outflows and the changes in construction intensity that they caused, that is why he denoted them as “demographic” or “building” cycles. Kuznets swings have been also interpreted as infrastructural investment cycles Kondratiev wave or long technological cycle 40-60 years Connected with great scientific discoveries and new technologies converted into production processes.

Changes in economic indices as signals of economic cycles это система показателей, сигнализирующих о наступающей понижательной волне цикла: ВВП и ВНП уровень безработицы, товарно-материальные запасы и запасы факторов производства уровень цен объем денежной массы, скорость обращения денег, краткосрочные ставки процента и т.п.

Changes in economic indices as signals of economic cycles Pro-cyclic indices grow in expansion, and reduce in recession (GDP, AD, AS, price level, monetary aggregates (Мо, М1, М2, М3), money velocity). Contra-cyclic indices reduce in expansion but grow in recession (unemployment rate, number of bankruptcies, volumes of production in the stocks). Acyclic indices fluctuate independently from the cycle (export and import volumes).

Government policy against cycles it is a system of methods to influence the economic situation and economic activity aimed at mitigating cyclical fluctuations

Подходы к антициклическому регулированию classic keynesian Preferably monetary tools: - Reduce in monetary supply in order to win inflation, raise the interest rates in order to avoid capital oversaving Preferably fiscal and spending tools: built-in automatic stabilizers(taxes grow in expansion and reduce in recession, Govt spending reduce in expansion and grow in recession)