1. CONTEMPORARY ECONOMICS© Thomson South-Western 11.3Business Cycles  Distinguish between the two phases of the business cycle, and compare the average length of each.  Differentiate among leading, coincident, and lagging economic indicators. Objectives

2. CONTEMPORARY ECONOMICS© Thomson South-Western 11.3Business Cycles  business cycle  recession  expansion  leading economic indicators Key Terms

3. CONTEMPORARY ECONOMICS© Thomson South-Western 11.3 Business Cycles SLIDE 3 U.S. Economic Fluctuations The business cycle reflects the rise and fall of economic activity relative to the long-term growth trend of the economy.

4. CONTEMPORARY ECONOMICS© Thomson South-Western 11.3 Business Cycles SLIDE 4 Recessions and Expansions A recession is a decline in total production lasting at least two consecutive quarters, or at least six months. Expansion is the phase of economic activity during which the economy’s total output increases.

5. CONTEMPORARY ECONOMICS© Thomson South-Western 11.3 Business Cycles SLIDE 5 Long-Term Growth The U.S. economy has grown dramatically over the long run. Reasons production tends to increase over the long run Increases in the amount an quality of resources, especially labor and capital Better technology Improvements in the rules of the game that facilitate production exchange

6. CONTEMPORARY ECONOMICS© Thomson South-Western 11.3 Business Cycles SLIDE 6 Business Cycles Business cycles reflect movements of economic activity around a trend line that shows long-term growth. Figure 11.5

7. CONTEMPORARY ECONOMICS© Thomson South-Western 11.3 Business Cycles SLIDE 7 History of U.S. Business Cycles Economists at the National Bureau of Economic Research have been able to track the U.S. economy back to 1854. Between 1854 and 2006, the nation experienced 32 business cycles. The longest expansion began in the spring of 1991 and lasted ten years. The longest contraction lasted five and a half years, from 1873 to 1879.

8. CONTEMPORARY ECONOMICS© Thomson South-Western 11.3 Business Cycles SLIDE 8 Annual Percentage Change in U.S. Real GDP Since 1929 Figure 11.6

9. CONTEMPORARY ECONOMICS© Thomson South-Western 11.3 Business Cycles SLIDE 9 Different Impact on States The intensity of the business cycle varies from region to region across the United States. A recession hits hardest those regions that produce durable goods.

10. CONTEMPORARY ECONOMICS© Thomson South-Western 11.3 Business Cycles SLIDE 10 Business Cycles Around the Globe Market economies around the world often move together. A slump in other major economies could worsen a recession in the United States, and vice versa.

11. CONTEMPORARY ECONOMICS© Thomson South-Western 11.3 Business Cycles SLIDE 11 U.S. and U.K. Growth Rates in Real GDP Figure 11.7 Growth rates of output in the United States and the United Kingdom are similar.

12. CONTEMPORARY ECONOMICS© Thomson South-Western 11.3 Business Cycles SLIDE 12 Economic Indicators Leading economic indicators are measures that usually predict, or lead to, recessions or expansion. Coincident economic indicators are those measures that reflect peaks and troughs as they happen. Lagging economic indicators follow, or trail, changes in overall economic activity.