1. Business Cycles

2. A B E C D

3. GDP starts to decline after this
Business Cycles
the series of growing and shrinking periods of economic activity, measured by increases or decreases in real GDP. Has 4 distinct periods.
Stage A: Peak
The point at which real GDP is the highest peak of the business cycle. As prices rise and resources tighten, businesses become less profitable.
GDP starts to decline after this

4. Stage B: Contraction
Prices tend to stabilize or fall.
Unemployment rises because employers produce less.

5. Stage C: Trough
“Bottom” (hopefully) of cycle. The point at which real GDP and employment stop declining.
Stage D: Recession/Depression
Can cause a recession, a contraction that lasts 6 months or more
Can cause a depression, an extended period of high unemployment and limited business activity.

6. Stage E: Expansion
Real GDP grows from a low point. It is a period of economic growth, or an increase in a nation’s GDP.
Jobs are easy to find, unemployment decreases. More resources are needed to keep up with demand.
A business cycle is complete when it has gone through all four phases.

7. Predicting Business Cycles
Economists try to predict business cycles to assist businesses and gov’t in making decisions. Based on a set of economic indicators:
Leading indicators: measures economic performance that usually changes 6-9 months before real GDP changes.
Ex: new building permits, orders for capital goods, stock prices.

8. Coincident indicators: measures of economic performance that usually change at the same time as real GDP.
Ex: employment, sales volume, personal income.
Lagging indicators: measures of economic performance that usually change after real GDP changes. Useful for confirming the end of expansion or contraction.
Ex: unemployment, ratio of consumer credit to personal income.