Causes and Indicators of Business Fluctuations Chapter 13 Section 5 Causes and Indicators of Business Fluctuations

Causes of Business Fluctuations For many years economists believed that business fluctuations occurred in regular cycles. Today economists tend to link business fluctuations to 4 main forces: Business Investment Government Activity External Factors Psychological Factors

Business Investment Some economists believe that business decisions are the key to business fluctuations. Business investment involves companies expanding or scaling back, or companies using innovations in their business practices. Innovation: inventions and new production techniques When businesses anticipate a downturn in the economy, they cut back their investments and inventories.

Government Activity A number of economists believe that the changing policies of the federal government are a major reason for business cycles. Government activity involves taxing and spending policies, and control of money supply in economy.

External Factors Factors outside a nation's economy also influence the business cycle. External factors are non-economy related factors, such as wars or raw material costs. The impact of wars results from the increase in government spending during wartime. New sources of raw materials may lower operating costs for certain industries.

Psychological Factors Psychological factors are people’s optimistic or pessimistic outlook on the future and the economy and can contribute to increased spending or more saving.

Economic Indicators Business leaders are faced with the dilemma of trying to predict what will happen to the economy in the coming months or years. Economists and the government create forecasts to try and aid in predicting the future of the economy. They are usually too broad to be helpful.

Economic Indicators Economists then turn to indicators to help predict the economy more accurately. Economic Indicators: statistics that measure variables in the economy Often different indicators within a group move in opposite directions. It can take a long time before a change in an indicator is felt in the economy.

Economic Indicators Economic indicators can be placed into 3 groups: Leading Indicators Coincident Indicators Lagging Indicators

Economic Indicators Leading Indicators: statistics that point to what will happen in the economy They seem to lead to a change in overall business activity- whether it is an upward or a downward trend. The Commerce Department keeps track of numerous leading indicators. Example: Weekly initial claims for unemployment insurance New orders for consumer goods Stock prices

Economic Indicators Coincident Indicators: economic indicators that usually change at the same time as changes in overall business activity They indicate a downswing or upswing has begun. Examples: Personal income minus transfer payments Rate of industrial production Sales of manufacturers, wholesalers, and retailers

Economic Indicators Lagging Indicators: indicators that seem to lag behind changes in overall business activity It could be months after the start of a downturn before businesses begin to reduce borrowing. Lagging indicators give economists clues as to the duration of the phase of the business cycles Examples: Average length of unemployment Size of manufacturing and trade inventories Change in CPI for services