1. CHATER: 2 THE BUSINESS CYCLE
Business cycle
The level of economic activity within the country does not remain steady and constant. Sometimes there
are periods of growth in the economy with a succeeding increase in the level of economic activity.
Periods of Increase in the level of economic production is known as economic booms.
Periods of decline in the level of economic activity is known as recessions.
The pattern of expansion and contraction in the economy is known as the business cycle.
2.1 What is business cycle?
The business cycle is the pattern of upswing and downswing that can be distinguished in economic
…activity over a number of years.
One complete cycle has four elements : a trough ,an upswing or expatiation ( often called a boom ) , a
peak and a downswing or contraction ( often called a recession )
2.2 Causes of business cycle
2.2.1 Exogenous factors (originate outside the market system)
Changes in Weather conditions affect agriculture production and thus the level of economic output.
Inappropriate monetary policy causes changes in money supply as a result change in business cycle
2.2.2Endogenous factors (originated from the market)
The improvement of business condition will result in increase in economic output. And successive
economic boom-
Boom will results in increase in interest rates, an increase imports a fall in foreign exchange reserves.
Decline at level of economic activities will results in the decrease interest rates, a fall in imports an
increase in foreign reserves.
2.2.3Structural factors (institutional factors)
Trade restrictions and boycotts, political stability, political transformations and
technological advances
2.3 Smoothing of business cycle
Concepts to be considered
 Monetary policy refer to any measures taken by SARB to influence supply of money and interest rate
with the view of achieving stable price and economic growth
 Fiscal policy refer to the government use of taxation and government spending to achieve economic
objective of the state
1. Expansionary monetary policy
refer to the policy that stimulate economic activity by increasing the size of money supply
2. Expansionary fiscal policy
Refer to fiscal policy that promotes economic activity by increasing government spending (G)
Reduce the level of taxes

2. 3. Restrictive monetary policy
Refer to monetary policy that attempts to decrease the level of economic activity by decrease the size of the
money supply
4. Restrictive fiscal policy
Seeks to decrease the level economic activity by reducing government spending (G)
And increase the level of taxes
1. Period of Recession
• During a recession, jobs are lost and there is a feeling of pessimism
• Employment levels drop, and there is a decrease in economic activity, and the economy slows down
2. Period of Depression
• During a depression money is in short supply leading to a further decline in spending
• There is a negative impact on investment spending
• When economic activity is at its lowest, a trough is reached at point D
• There is competition for jobs and the cost of production decreases
• This encourages foreign trade and leads to a recovery
3. Period of Recovery
• During a recovery, production increases and more jobs are created
• Business confidence rises and there is increased spending by firms
• There is increased economic activity and the country enters into a period of prosperity
4. Period of Expansion
• During a period of expansion there is a great degree of optimism � � Employment levels rise, salaries and
wages rise and spending increases
• A peak is reached at point B/F
• A larger amount of money is in circulation and this leads to an inflationary situation

3. 5. Trend
• The cycle continues oscillating0 along a trend line and in-between upper and lower limits
• The trend line that rises gradually represents the average effect on the economy over time
• Positively sloped: show that GDP is rising over time on average
Using business cycle for forecasting (estimate)
If the business cycle is entering an upswing phase is possible to predict that there will be a decline in
the level of unemployment.
If the business cycle is entering an downswing phase is possible to predict that there will be a increase
in the level of unemployment and
2.4.1 THREE GROUPS OF BUSINESS CYCLE INDICATORS:
1.1 Leading indicators
1.2 Lagging indicators
1.3 Coincident indicators
1.1 Leading indicators
• Lead the cycles in economic growth by a fixed period
• Cyclical behaviour have a fixed have a fixed relationship with the business cycle
• Used to predict turning points in each other, since they should also lead those thatlead the business
cycle
• Peak before the peak in aggregate economic activity
• Reach the trough before the aggregate economic activity reaches a trough
• Advance the warning of changes in aggregate economic activity
1.2 Lagging indicators
• Follow coincident indicators
• Serve to confirm the behaviour of the coincident indicators
• If it does not confirm the upswing or downswing for instance, it signals that the upswing or downswing is
weak and will most likely end at an early stage
• Change direction after reference turning points in the business cycle has been reached
• Confirm changes that were first indicated by the leading indicators and then the coincident indicators
• Provide an advance signal of a turning point in the business cycle
• First to reflect imbalances that intensify (increase) or subsidize (decrease) in the economy
• Influence of movements on subsequent movements in the leading indicators help explain the view that
one business cycle generates the next one
1.3 Coincident indicators
• Gross value added at constant prices, excluding agriculture, forestry and fishing

4. • Value of wholesale, retail and new vehicle sales at constant prices
• Utilization of production capacity in manufacturing
• Total formal non-agricultural employment
• Industrial production index