Chater 2 business cycle 22

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

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

bull During a recession jobs are lost and there is a feeling of pessimism bull Employment levels drop and there is a decrease in economic activity and the economy slows

2 Period of Depression

bull During a depression money is in short supply leading to a further decline in spending bull There is a negative impact on investment spending bull When economic activity is at its lowest a trough is reached at point D bull There is competition for jobs and the cost of production decreases bull This encourages foreign trade and leads to a recovery

3 Period of Recovery

bull During a recovery production increases and more jobs are created bull Business confidence rises and there is increased spending by firms bull There is increased economic activity and the country enters into a period of prosperity

4 Period of Expansion

bull During a period of expansion there is a great degree of optimism 10486331048633 Employment levels rise salaries and wages rise and spending increases

bull A peak is reached at point BF bull A larger amount of money is in circulation and this leads to an inflationary situation

5 Trend

bull The cycle continues oscillating0 along a trend line and in-between upper and lower limits bull The trend line that rises gradually represents the average effect on the economy over time bull Positively sloped show that GDP is rising over time on average

What causes the business cycle

Exogenous factorsEndogenous actorsStructural 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 taxesRestrictive monetary policy Refer to monetary policy that attempts to decrease the level of economic ativity by decrease the size of the

money supplyRestrictive 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

11 Leading indicators 12 Lagging indicators 13 Coincident indicators

11 Leading indicators

bull Lead the cycles in economic growth by a fixed period

bull Cyclical behaviour have a fixed have a fixed relationship with the business cycle bull Used to predict turning points in each other since they should also lead those thatlead the

business cyclebull Peak before the peak in aggregate economic activitybull Reach the trough before the aggregate economic activity reaches a troughbull Advance the warning of changes in aggregate economic activity

12 Lagging indicators

bull Follow coincident indicatorsbull Serve to confirm the behaviour of the coincident indicatorsbull 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 stagebull Change direction after reference turning points in the business cycle has been reachedbull Confirm changes that were first indicated by the leading indicators and then the coincident

indicatorsbull Provide an advance signal of a turning point in the business cyclebull First to reflect imbalances that intensify (increase) or subsidize (decrease) in the economybull Influence of movements on subsequent movements in the leading indicators help

explain the view that one business cycle generates the next one

13 Coincident indicators

bull Gross value added at constant prices excluding agriculture forestry and fishingbull Value of wholesale retail and new vehicle sales at constant prices bull Utilization of production capacity in manufacturing bull Total formal non-agricultural employment bull Industrial production index