Economic Cycles: Definition and Stages

1. Economic Cycles - Part 1
Definition and stages
WACE Economics Unit 4
Video 9.1

2. (c) Andrew Tibbitt 2017 Slide 2
The term ‘economic cycle’ is used to describe
the short term movements of the economy
about its trend path.
Economic Cycles trace the movement of the
economy through a regular sequence of
phases or stages.
Definition

3. 0.0
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Mar-2007
Jun-2007
Sep-2007
Dec-2007
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Dec-2008
Mar-2009
Jun-2009
Sep-2009
Dec-2009
Mar-2010
Jun-2010
Sep-2010
Dec-2010
Mar-2011
Jun-2011
Sep-2011
Dec-2011
Mar-2012
Jun-2012
Sep-2012
Dec-2012
Mar-2013
Jun-2013
Sep-2013
Dec-2013
Mar-2014
Jun-2014
Sep-2014
Dec-2014
Mar-2015
Jun-2015
Sep-2015
Dec-2015
Mar-2016
Jun-2016
Sep-2016
Dec_2016
Mar-2017
Jun-2017
(c) Andrew Tibbitt 2017 Slide 3
Growth in the economy is unstable and its quarter by
quarter movements appear to be unpredictable.
ST TREND
GROWTH
RATE
ACTUAL
GROWTH
RATE

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Mar-2007
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Mar-2009
Jun-2009
Sep-2009
Dec-2009
Mar-2010
Jun-2010
Sep-2010
Dec-2010
Mar-2011
Jun-2011
Sep-2011
Dec-2011
Mar-2012
Jun-2012
Sep-2012
Dec-2012
Mar-2013
Jun-2013
Sep-2013
Dec-2013
Mar-2014
Jun-2014
Sep-2014
Dec-2014
Mar-2015
Jun-2015
Sep-2015
Dec-2015
Mar-2016
Jun-2016
Sep-2016
Dec_2016
Mar-2017
Jun-2017
(c) Andrew Tibbitt 2017 Slide 4
A model simplifies things and hopefully makes
analysis easier.
LT TREND
GROWTH
RATE
CEILING - POTENTIAL
GROWTH RATE
FLOOR GROWTH RATE

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1.0
2.0
3.0
4.0
5.0
6.0
Mar-2007
Jun-2007
Sep-2007
Dec-2007
Mar-2008
Jun-2008
Sep-2008
Dec-2008
Mar-2009
Jun-2009
Sep-2009
Dec-2009
Mar-2010
Jun-2010
Sep-2010
Dec-2010
Mar-2011
Jun-2011
Sep-2011
Dec-2011
Mar-2012
Jun-2012
Sep-2012
Dec-2012
Mar-2013
Jun-2013
Sep-2013
Dec-2013
Mar-2014
Jun-2014
Sep-2014
Dec-2014
Mar-2015
Jun-2015
Sep-2015
Dec-2015
Mar-2016
Jun-2016
Sep-2016
Dec_2016
Mar-2017
Jun-2017
(c) Andrew Tibbitt 2017 Slide 5
The model suggests the economy passes through
a sequence of stages or phases
BOOM
DOWNTURN
SLUMP
RECOVERY

6. (c) Andrew Tibbitt 2017 Slide 6
What happens at each stage?
Macroeconomic objectives
Boom Downturn Recession Recovery
Growth
Inflation
Unemployment
Income distribution
Current Account
Exchange Rate
Foreign liabilities

7. (c) Andrew Tibbitt 2017 Slide 7
What happens at each stage?
Macroeconomic objectives
Boom Downturn Recession Recovery
Growth High Falling Low Rising
Inflation High Falling Low Rising
Unemployment Low Rising High Falling
Income distribution ? ? ? ?
Current Account High CAD Falling CAD Low CAD Rising CAD
Exchange Rate ? ? ? ?
Foreign liabilities Rising Stable Stable Rising

8. (c) Andrew Tibbitt 2017 Slide 8
What happens at each stage?
Components of aggregate demand
Boom Downturn Recession Recovery
Survival consumption
Induced consumption
Planned investment
Government welfare
Other government
Exports
Imports

9. (c) Andrew Tibbitt 2017 Slide 9
What happens at each stage?
Components of aggregate demand
Boom Downturn Recession Recovery
Survival consumption Steady Steady Steady Steady
Induced consumption High Falling Low Rising
Planned investment High Falling Low Rising
Government welfare Low Rising High Falling
Other government Steady Steady Steady Steady
Exports ? ? ? ?
Imports High Falling Low Rising

10. (c) Andrew Tibbitt 2017 Slide 10
What happens at each stage?
Policy measures
Boom Downturn Recession Recovery
Budget balance
Interest Rates

11. (c) Andrew Tibbitt 2017 Slide 11
What happens at each stage?
Policy measures
Boom Downturn Recession Recovery
Budget balance Surplus Reduces Deficit Improves
Interest Rates High Falling Low Rising

12. (c) Andrew Tibbitt 2017 Slide 12
What happens at each stage?
Aspects of economic models
Boom Downturn Recession Recovery
Potential GDP growth
Actual GDP growth
GDP gap

13. (c) Andrew Tibbitt 2017 Slide 13
What happens at each stage?
Aspects of economic models
Boom Downturn Recession Recovery
Potential GDP growth Steady Steady Steady Steady
Actual GDP growth High Slow Low Rising
GDP gap Small Rising Big Reducing

14. (c) Andrew Tibbitt 2017 Slide 14
What happens at each stage?
Other indicators
Boom Downturn Recession Recovery
Cranes on skyline
Empty shops
Bankruptcies
Concrete production

15. (c) Andrew Tibbitt 2017 Slide 15
What happens at each stage?
Other indicators
Boom Downturn Recession Recovery
Cranes on skyline Many Fewer Few More
Empty shops Few More Many Fewer
Bankruptcies Few More Many Fewer
Concrete production High Falling Low Rising

16. End of part 1
(c) Andrew Tibbitt 2017 Slide 16