1. CHATER: 2 THE 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.
What us business cycle
Is define as the recurrent, but not periodic, pattern of the expansion and contraction in
the level of economic activity that occurs within the country
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

2. 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
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
What causes the business cycle?
Exogenous factors
Endogenous actors
Structural factors
Smoothing of business cycle
Expansionary monetary policy
refer to the policy that stimulate economic activity by increasing the size of money supply
Expansionary fiscal policy
Refer to fiscal policy that promotes economic activity by increasing government spending (G)
Reduce the level of taxes
Restrictive monetary policy
Refer to monetary policy that attempts to decrease the level of economic ativity by decrease the size of the
money supply
Restrictive fiscal policy
Seeks to decrease the level economic activity by reducing government spending (G)
And increase the level of taxes
1. THREE GROUPS OF BUSINESS CYCLE INDICATORS:
1.1 Leading indicators
1.2 Lagging indicators

3. 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
• 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