Phases of the Business Cycle More in Dept. Business Cycle Definition: alternating increases and decreases in the level of business activity of varying.

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Phases of the Business Cycle More in Dept

Business Cycle Definition: alternating increases and decreases in the level of business activity of varying amplitude and length How do we measure “increases and decreases in business activity?” –Percent change in real GDP!

Business Cycle Why do we say “varying amplitude and length?” –Some downturns are mild and some are severe –Some are short (a few months) and some are long (over a year) Do not confuse with seasonal fluctuations!

Note: Shaded areas indicate recessions. Real GDP , in 2000 dollars Note: “Years” is on horizontal axis and “real GDP” is on vertical axis. General trend of economic growth Recession years are shaded blue: note downward slope on graph indicating that GDP is decreasing.

Expansion Recession The Phases of the Business Cycle Boom Secular growth trend Downturn Upturn Trough Peak 0 Jan.- Mar Total Output Apr.- June July- Sept. Oct.- Dec. Jan.- Mar Apr.- June July- Sept. Oct.- Dec. Jan.- Mar Apr.- June McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Long-Run Economic Growth Secular long-run growth, or long-run growth, is the sustained upward trend in aggregate output per person over several decades. A country can achieve a permanent increase in the standard of living of its citizens only through long-run growth. So a central concern of macroeconomics is what determines long-run growth.

The Conventional Three- Phase Business Cycle 10-4 Copyright  2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Recession What is a recession? –Generally, 2 or more quarters of declining real GDP –Implication: it’s not officially a called a recession until the economy has already been declining for 6 months!

Who decides when we’re in a recession? –National Bureau of Economic Research traditionally declares recessions –Private research organization, not a federal agency Recession dates from peak of business

Another Look at Expansions and Recessions Can you find a pattern? Neither can economists! That’s why recessions are hard to predict.

Business Cycle Theories Endogenous theories: –Innovation theory: innovation leads to saturation. –Psychological theory: alternating optimism and pessimism –Inventory cycle theory: inventory and demand not in sync –Monetary theory: changes in money supply by Federal Reserve –Underconsumption theory: or overproduction

Business Cycle Theories Exogenous theories: –The external demand shock theory: effect of foreign economies –War theory: war stimulates economy; peace leads to recession –The price shock theory: fluctuations in oil prices

Endogenous Starts from within the model Endo- inside, source Genous- born

Exogenous From outside of the model Exo- outside Genous- born, source