Objectives

1. What are the 4 phases of the business cycle? 2.What factors influence the business cycle? 3. What are the 3 leading indicators used to

determine the current phase of the business cycle and predict where the economy is headed?

4. Terms: business cycle, expansion, peak, contraction, trough, recession, leading indicators, coincident indicators, lagging indicators.

5. Define/compare/contrast terms; extrapolate current conditions into the future of economy.

Review GDP

Define GDP---- Why do you only count the “final”

value of goods and services? Why do you not count the value of

goods or services produced in a previous year?

Define “durable” and “non-durable” goods--

Business Cycles

Business Cycles--are fluctuations or changes, or phases in a market systems economic activity. These changes are measured by

increases or decreases in real GDP.

Phases of a Business Cycle

Business Cycle Phases: Expansion or recovery Peak Contraction or recession Trough

Business Cycle Phases

Expansion—A period of economic expansion and growth.

Peak—A high point at which the economy is at its strongest and most prosperous.

Business Cycle Phases, cont’d

Contraction—When real GDP enters a period of business slowdown.

Recession—a decline in real GDP for two or more consecutive quarters.

Depression—are prolonged and severe recessions.

Trough—The final stage in the business cycle; demand, production, and employment reach their lowest levels

Business Cycles Diagram

Business Cycles

Influences on the Business Cycle: Business investment—High levels

promote expansion; low levels contribute to contractions.

Interest rates and credit—When interest rates are low, businesses and individuals generally borrow more money.(Inverse is also true).

Influences on business cycle

Consumer Expectations—If consumers think economy is heading toward recession, then they will limit their spending.

External Factors—World economic and political climate affect the business cycle in the U.S. High oil prices of 1973, 1984. War affects the business cycle.

Predicting the Business Cycle

3 Types of Economic Indicators: Leading indicators—

(Anticipate)changes in building permits, prices of raw materials, stock market, interest rates.

Coincident indicators—Personal income, sales volume, industrial production.

Lagging Indicators –Changes months after an upturn. Ex. Business profits, unemployment.

Markets Experience Fluctuations

Retail sales are highest in December Construction tends to increase in the

Spring. Furniture sales tend to peak in the fall.

Data is adjusted for seasonal fluctuations How did this December compare to last

December sales? Etc.