Business Cycles Ebb and Flow Of Economies

Business Cycles  Periods of macroeconomic expansion followed by period of macroeconomic contraction.  Major changes in Real GDP. 4 phases  1.Expansion- growth and rise in Real GDP.  Economic Growth-steady and long-term rise in Real GDP. Jobs+++++, production+++ spending  2.Peak-When real GDP stops rising  3.Contraction-Falling Real GDP. Production falls and unemployment rises.

Business Cycles  4. Trough-economy has bottomed out and Real GDP has stopped falling.  3 terms about Contraction of Economy  Recession-Real GDP drops for 6-18 consecutive months. (2 qtrs.) Unemployment up (6-10%), output down.  Depression- No precise definition- deep, long depression. High unemployment, poor business conditions, despair

Business Cycles  Stagflation- Decline in Real GDP and inflation or rise in price levels.  4 factors that drive business cycles  Business investment- expansion vs cut backs  Interest rates/credit-interest rates &borrowing  Consumer expectations-consumer confidence  External Shocks- positive and negative outside effects on society/business and production

Business Cycle Forecasting  Remember- looking at GDP is like looking in rear view mirror. Predicting is difficult  Economist look at leading indicators  Stock market  Interest rates  Manufacturer’s orders for capital goods.  Up to indicators!! Housing starts also.