Peak ry ve co Re Trough on ion ssi ss ce ce Re RePeak
Business Cycles √ The term business cycle refersto the recurrent ups and downs in thelevel of economic activity, whichextend over several years. √ Individual business cycles mayvary greatly in duration and intensity. √ All display a set of phases.
THE BUSINESS CYCLE Phases of the Business CyclePEAK RECESSION TROUGH RECOVERY TH OW D Level of business activity GR EN TR Time
Level of business activity PEAK H WT G RO ND E TR Time√ Peak or prosperity phase: Real output in the economy is at a high level Unemployment is low Domestic output may be at its capacity Inflation may be high.
Level of business activity RECESSION H WT G RO ND E TR Time√ Contraction or recession phase: Real output is decreasing Unemployment rate is rising.As contraction continues, inflation pressure fades. If the recession is prolonged, price may decline (deflation)The government determinant for a recession is twoconsecutive quarters of declining output.
TROUGH Level of business activity H WT G RO ND E TR Time√ Trough or depression phase: Lowest point of real GDP Output and unemployment “bottom out” This phase may be short-lived or prolonged There is no precise decline in output at which aserious recession becomes a depression.
Level of business activity RECOVERY H WT G RO ND E TR Time√ Expansionary or recovery: Real output in the economy is increasing Unemployment rate is declining The upswing part of the cycle.
Business Cycle-one cycle through 4 phasesReal GDP Peak Peakper year ry ve Re co Re ce Re ce ss ss io io nn Trough One cycle Time
Recessions since 1950 show that duration and depth are varied:Period Duration in months Depth (decline in real GDP)1953-54 10 — 3.0%1957-58 8 — 3.5%1960-61 10 — 1.0%1969-70 11 — 1.1%1973-75 16 — 4.3%1980 6 — 3.4%1981-82 16 — 2.6%1990-91 8 — 2.6%2001 8 app. —3.3%
How Indicators Monitor the Four Phases of the Business Cycle• The Leading Indicator System … provides a basis for monitoring thetendency to move from one phase to the next. …assesses the strengths and weaknesses in theeconomy … gives clues to a quickening or slowing offuture rates of economic growth … indicates the cyclical turning points inmoving from the upward expansion to the downwardrecession, and from the recession to the upwardrecovery.
Causes of FluctuationsInnovation Political eventsRandom events WarsLevel of consumer spending Seasonal fluctuationsCyclical Impacts — durable and nondurable
An Actual Business Cycle An Actual Business Cycle 1981 --1990 ($ billion, 1992 dollars) 1981 1990 ($ billion, 1992 dollars)Real GDP 6000 Peak 5200 Peak 4600 Trough ‘80 82 ‘85 ‘90 One Cycle
Global Depression, 1929-1932 Ave. Unemployment Rate, 1925-1928 Ave. Unemployment Rate, 1929-1933 Percent Decrease in Prices, 1929-1932
Six Million “Rosie the Riveters”World War II Production of these items brought us outof the Great Depression.300,000 warplanes124,000 ships289,000 combat vehicles and tanks36 billion yards of cotton goods41 billion rounds of ammunition2.4 million military trucks111,527 tank guns and howitzers •$288 billion was spent on the war, •$100 billion in the first six months.Unemployment hit an all-time low of 1.2%and personal savings were 25.5%.