Understanding the Business Cycle: Expansions, Contractions, and Recessions, Slides of Macroeconomics

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BUSINESS CYCLE

What is a business cycle?

• A business cycle refers to periods of expansion

and contraction.

• A peak is the high point following a period of economic expansion. A trough is the low point following a period of economic decline.

According to Arthur F. Burns

• Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises. ‡A cycle consists of: Expansions. Contractions

Politically based business cycle.

• The political business cycle is an alternative theory stating that when an administration of any hue is elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. It then adopts an expansionary policy in the lead up to the next election, hoping to achieve simultaneously low inflation and unemployment on E lection Day.

Stages of Business Cycle 

• Expansion : A speedup in the pace of economic

activity.

• ‡ Peak : The upper turning of a business cycle.
• ‡ Contraction : A slowdown in the pace of

economic activity.

• ‡ Trough : The lower turning point of a business

cycle, where a contraction turns into an expansion

Stages

Expansion

• Production up
• E mployment up

‡ Peak

• Production highest
• E mployment highest
• Inflationary pressure

Peak

• Low levels of unemployment - shortages of

labour occur pushing up wage rates

• ‡ High levels of consumer borrowing and spending ‡ Firms working at full capacity ‡ Profit levels high ‡ Inflation Increasing ‡ Interest rates increasing ‡ Boom in housing market

Recession

• ‡ Recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction.
• ‡Production as measured by Gross Domestic Product (GDP),employment, investment spending, capacity utilization household incomes, business profits and inflation fall during recessions.
• ‡Bankruptcies and the unemployment rate rises.

Recovery

• Consumer confidence grows leading to

increased borrowing and spending

• ‡Firms increase output build up stock levels ‡Spare capacity used, then‡ Investment occurs ‡Unemployment falls it make take more than a year of recovery for large changes in unemployment.