Business Cycle

11 Key excerpts on "Business Cycle"

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  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  This long definition is rich with important insights. First, Business Cycles are typical of economies that rely mainly on business enterprises—therefore, not agrarian societies or cen- trally planned economies. Second, a cycle has an expected sequence of phases representing alternation between expansion and contraction. Third, such phases occur at about the same time throughout the economy—that is, not just in agriculture or not just in tourism but in almost all sectors. Fourth, cycles are recurrent (i.e., they happen again and again over time) but not periodic (i.e., they do not all have the exact same intensity and duration). Finally, cycles typically last between one and 12 years. Although Burns and Mitchell’s definition may appear obvious in part, it indeed remains helpful even more than 60 years after it was written. Many investors like to think that there are simple regularities that occur at exactly the same time, every year or cycle: for example, shares always rally in January and big crashes occur in October. Of course, things are much more complex. The truth, as Burns and Mitchell remind us, is that history never repeats itself exactly, but it certainly has similarities that can be taken into account when analyzing the present and forecasting the future. 2.1. Phases of the Business Cycle A Business Cycle consists of four phases: trough, expansion, peak, contraction. The period of expansion occurs after the trough (lowest point) of a Business Cycle and before its peak 280 Economics for Investment Decision Makers (highest point), and contraction is the period after the peak and before the trough. 1 During the expansion phase, aggregate economic activity is increasing (aggregate is used because some individual economic sectors may not be growing). The contraction—often called a recession, but may be called a depression when exceptionally severe—is a period in which aggregate economic activity is declining (although some individual sectors may be growing).

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  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  Whereas the chapter on national income accounting and growth focused on long-term economic growth and the factors that help foster it, this chapter addresses short-term movements in economic activity. Some of the factors causing such short-term movements are the same as those causing economic growth, such as changes in population, technology, and capital. However, other factors, such as money and inflation, are more specific to short-term fluctuations.

  This chapter is organized as follows. Section 2 describes the Business Cycle and its phases, explaining the behaviors of businesses and households that typically characterize phases and transitions between phases. Section 3 provides an introduction to Business Cycle theory, in particular how different economic schools of thought interpret the Business Cycle and their recommendations with respect to it. Section 4 introduces basic concepts concerning unemployment and inflation, two important economic policy concerns that are sensitive to the Business Cycle. Section 5 discusses variables that fluctuate in predictable time relationships with the economy, focusing on variables whose movements have value in predicting the future course of the economy. A summary and practice problems conclude the chapter.

  2. OVERVIEW OF THE Business Cycle

  Burns and Mitchell (1946) define the Business Cycle as follows:

  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 occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; this sequence of events is recurrent but not periodic; in duration, Business Cycles vary from more than one year to 10 or 12 years.

  This long definition is rich with important insights. First, Business Cycles are typical of economies that rely mainly on business enterprises—therefore, not agrarian societies or centrally planned economies. Second, a cycle has an expected sequence of phases representing alternation between expansion and contraction. Third, such phases occur at about the same time throughout the economy—that is, not just in agriculture or not just in tourism but in almost all sectors. Fourth, cycles are recurrent (i.e., they happen again and again over time) but not periodic (i.e., they do not all have the exact same intensity and duration). Finally, cycles typically last between one and 12 years.

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  2024 CFA Program Curriculum Level I Box Set

  • (Author)
  • 2023(Publication Date)
  • Wiley

    (Publisher)

  In the lessons that follow, we describe credit cycles, introduce several theories of Business Cycles, and explain how different economic schools of thought interpret the Business Cycle and their recommendations with respect to it. We also discuss variables that demonstrate predictable relationships with the economy, focusing on those whose movements have value in predicting the future course of the economy. We then proceed to explain measures and features of unemployment and inflation.

  Learning Module Overview

  • Business Cycles are recurrent expansions and contractions in economic activity affecting broad segments of the economy.
  • Classical cycle refers to fluctuations in the level of economic activity (e.g., measured by GDP in volume terms).
  • Growth cycle refers to fluctuations in economic activity around the long-term potential or trend growth level.
  • Growth rate cycle refers to fluctuations in the growth rate of economic activity (e.g., GDP growth rate).
  • The overall Business Cycle can be split into four phases: recovery, expansion, slowdown, and contraction.
  • In the recovery phase of the Business Cycle, the economy is going through the “trough” of the cycle, where actual output is at its lowest level relative to potential output.
  • In the expansion phase of the Business Cycle, output increases, and the rate of growth is above average. Actual output rises above potential output, and the economy enters the so-called boom phase.
  • In the slowdown phase of the Business Cycle, output reaches its highest level relative to potential output (i.e., the largest positive output gap). The growth rate begins to slow relative to potential output growth, and the positive output gap begins to narrow.

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  Classification and Clustering in Business Cycle Analysis.

  • Claus Weihs, Ullrich Heilemann, Ullrich Heilemann, Claus Weihs(Authors)
  • 2010(Publication Date)
  • Duncker & Humblot

    (Publisher)

  Still, important self-sustaining or endogenous elements undeniably exist in Business Cycles and it is mainly their study that promises progress in analysis and forecasting. Some prominent economists have worked in this difficult area with impressive results. They succeeded in describing what happens during expansions and contractions, and how one phase gives way to the other. These advances led to the acquisition of considerable tested knowledge of what caused specific fluctuations of the past. As defined and observed, the Business Cycle has a standard two-phase breakdown: a trough-to-peak expansion and a peak-to-trough contraction. Further subdivisions or classifications, however, are more complicated. Of the diverse suggested taxonomies, none has been generally accepted. However, much of the work has been revealing, and the resulting terms such as “recession,” “depression,” “revival,” “boom,” etc., are much in use. In this paper, I revisit the question of whether a multiple-stage conception of the Business Cycle is meaningful and applicable. The starting point is the distinction between Business Cycles and growth cycles, based on the classical decomposition of time series into trend, cyclical, seasonal, and irregular variations. The “contraction” (better known as recession, or when particularly severe, depression) suspends, without suppressing, the generally prevailing tendency of the market economy to grow. A recession ends at some point below the economy’s longer-term upward trend. The initial stage of an expansion is a rebound upward back to that trend. This is sometimes treated as a separate phase of “recovery.”It was frequently during the recoveries that the highest rates of growth in total economic activity were achieved. As the expansion proceeded, growth measured from a rising base tended to decline. As the economy regains and then exceeds its pre-recession peak, the recovery gives way to an above-trend growth phase.

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  Business Cycles: Fact, Fallacy And Fantasy

  Fact, Fallacy and Fantasy

  • Sumru G Altug(Author)
  • 2009(Publication Date)
  • World Scientific

    (Publisher)

  8 Business Cycles: Fact, Fallacy and Fantasy economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic; in duration Business Cycles vary from one year to ten or twelve years; they are not divisible into shorter cycles of similar cycles with amplitudes approximating their own. This definition has formed the basis of modern thinking about Business Cycles, whether it pertains to the measurement of Business Cycles or the construction of models of cyclical fluctuations. Burns and Mitchell [50] themselves noted that this definition raised as many questions as it sought to answer. Some of these questions are precisely the ones that we seek to answer in this book. If one talks about “fluctuations in the aggregate economic activity of nations”, then should one worry about differences in Business Cycle activity across regions? Should Business Cycles be considered in an international context? How about the historical nature of Business Cycles? Have Business Cycles moderated over time? Likewise, when one considers the statement regarding expansions occurring in “many economic activities”, how broadly should the aggregates that are being considered be defined? The notion that changes in economic activity occur “at about the same time” admit the possibility of economic variables that lead or lag the cycle. In seeking to identify “recurrent changes”, how should we deal with seasonal changes, random fluctuations, or secular trends? Finally, the comments regarding the duration and amplitude of Business Cycles are based on actual observations of cyclical phenomena, and also lay down rules for excluding irregular movements and other similar changes.

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  Demystifying Global Macroeconomics

  • John E. Marthinsen(Author)
  • 2020(Publication Date)
  • De Gruyter

    (Publisher)

  Chapter 14 Business Cycles What are Business Cycles, and why are they important to business managers? What causes them, and who determines when recessions or expansions start and end? After centuries of fluctuating economic activity, have nations gotten better at controlling or predicting Business Cycles, or are they as frequent, extreme, and fickle as ever? The Basics What Are Business Cycles? Business Cycles are recurring , irregular , and unsystematic movements in real economic activity around a long-term trend. They are recurring because down-turns and upturns in real economic activity have occurred for as far back as his-tory is written, and these cycles will surely continue in the future. Unlike the smooth and symmetric patterns of sound or light waves, Business Cycles are ir-regular and appear as jagged, uneven movements around a long-term trend. Business Cycles are also unsystematic, which means they are random and diffi-cult (some believe impossible) to predict. A considerable amount of time and effort has been devoted to predicting Business Cycles. Unfortunately, most of these predictions have been highly inaccurate. How Are Business Cycles Measured? Figure 14.1 shows a hypothetical Business Cycle. A recession occurs when there is a significant contraction in economic activity, which is spread broadly across the economy and lasts for more than a few months. The duration of a recession is from the peak of the Business Cycle to the trough (i.e., low point). An expansion is precisely the opposite. It occurs when broad-based eco-nomic activity improves significantly and is sustained for more than a few months. The duration of an expansion is from the cycle ’ s trough to its peak. The entire Business Cycle can be measured from one peak to the next peak, or it can be measured from one trough to the next. In Figure 14.1, the Business Cycle is measured from peak to peak. https://doi.org/10.1515/9781547401437-014

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  Macroeconomics for MBAs and Masters of Finance

  • Morris A. Davis(Author)
  • 2009(Publication Date)
  • Cambridge University Press

    (Publisher)

  Since the level of technology is, on average, increasing over time, the modern theory of Business Cycles is fundamentally linked to the theory of growth. Specifically, Business Cycles arise because the level of technology does not increase at exactly the same rate in each period, but rather displays cyclical patterns around a relatively fixed rate of growth. Business Cycles 169 5.1 Business Cycle Dates A group of economists at the NBER label the periods when the econ-omy is in “recession” and when the economy is in “expansion.” Basi-cally, and this is not quite a rule, the NBER economists label the economy as being in a recession when the growth rate of real GDP is negative for two consecutive quarters. In other words, a recession is associated with a decrease in the level of real output. The economy is expanding otherwise. On the NBER’s main Business Cycle page, www.nber.org/cycles/ cyclesmain.html, a list of contraction and expansion dates for the US economy is presented. The quarterly reference dates starting in 1945, along with duration data (in months) are listed in Table 5.1 . Figure 5.1 graphs the quarterly change in the natural log of real GDP over the 1949:1–2007:4 period. The shaded gray areas in this graph indicate the NBER recession dates that are listed in Table 5.1 . Note that the change in the natural log of real GDP is approximately equal to the growth rate of real GDP: Defining y t as real GDP in period t , 1 then ln ( y t ) − ln ( y t − 1 ) = ln y t y t − 1 = ln 1 + y t − y t − 1 y t − 1 ≈ y t − y t − 1 y t − 1 . 5.2 Trends and Cycles Although the NBER labels are helpful, macroeconomists have also developed formal procedures for defining Business Cycles and study-ing the cyclical properties of major macroeconomic variables. 1 See the appendix for a review.

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  Macroeconomics for Managers

  • Michael K. Evans(Author)
  • 2008(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  This episode is discussed in more detail later in this chapter. 15.4 The phases of the Business Cycle Impulse and Propagation We draw the distinction between impulse, which is the initial shock, and propagation, which is the ripple effect as this shock passes through all sectors of the economy. Although many upper turning points occur when interest rates rise in response to higher inflation, we saw in the late 1990s that full employment need not boost the inflation rate, so the theory that downturns are started by exogenous shocks can be a useful one for explaining recent Business Cycle patterns for several reasons: 1. It emphasizes the way in which exogenous shocks can still derail well-managed economies. 2. The 1995–2000 experience – full employment without higher inflation – empha- sizes how the expansion can end because of excess capacity even in the absence of clearly identifiable exogenous shocks. Business CycleS 573 3. No matter what combination of endogenous and exogenous factors causes the upper turning point, it is important to understand the propagation of the cycle throughout the economy from an initial shock as the downturn first intensifies and then weakens. Thus it will be useful, as we describe how the various phases of the Business Cycles begin and end, to keep in mind the distinction between the change that initiates the move from one phase to the other, and the factors that follow that change and determine the actual course of the economy during each of those phases. Since the Business Cycle is continuous, there is no one particular place to start with its description, but the standard procedure is to begin with the expansion phase, keeping in mind the factors that caused the recession to occur in the first place. A brief word about terminology. In the nineteenth and early twentieth centuries, downturns were often known as ‘‘panics’’ because of the temporary scarcity of liq- uidity.

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  Building Cycles

  Growth and Instability

  • Richard Barras(Author)
  • 2009(Publication Date)
  • Wiley-Blackwell

    (Publisher)

  38 Building Cycles: Growth and Instability in investment and employment, initiating a new upswing. Goodwin’s non-linear modelling approach continues to be developed (Goodwin et al., 1984; Velupillai, 1990), and its enduring appeal provides a strong link between the first generation of Business Cycle models and the second generation which was born in the mid-1970s. Rational expectations As indicated at the start of this chapter, there was a lull in the development of Business Cycle theory from the mid-1950s to the mid-1970s. Strong and sustained growth after the Second World War, allied with the apparent success of Keynesian demand management policies, created a consensus among economists that severe cyclical disturbances to growth were a thing of the past. The worldwide OPEC recessions of 1973–5 and 1979–82 destroyed that consensus and created the con- ditions for the emergence of several new strands of Business Cycle theory, each grounded in a particular school of contemporary economic thought (Phelps, 1990). Modern Business Cycle theory has developed as part of a broader movement over the past 30 years to articulate the microeconomic foundations of macroeconom- ics (Weintraub, 1979). These neoclassical micro-foundations are expressed in terms of ‘representative agents’, such as profit maximizing firms and utility maximiz- ing households, which operate rationally under conditions of flexible prices and market-clearing equilibria. The micro-foundations movement developed as a reac- tion to the perceived rigidities of Keynesian macroeconomics models such as the multiplier–accelerator, which were derived under the simplifying assumption of fixed prices. It is through a common micro-foundations approach that the search is being conducted to find a ‘new consensus in macroeconomics’ which can unite the competing schools (Arestis, 2007).

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  Macroeconomic Theory and the Eurozone Crisis

  • Alain Alcouffe, Maurice Baslé, Monika Poettinger, Alain Alcouffe, Maurice Baslé, Monika Poettinger(Authors)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  Alcouffe, M. Poettinger and B. Schefold. Routledge Studies in the History of Economics 191. London: Routledge, pp. 28–38. Schumpeter, J. A. (1961 [1934]): The Theory of Economic Development:An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle . New Brunswick, NJ: Transaction Books. Schumpeter, J. A. (1971 [1954]): History of Economic Analysis . London: Allen & Unwin. Spiethoff, A. (1925): Krisen. Entry in Handwörterbuch, Volume 6, edited by L. Elster et al. Jena: Fischer, pp. 8–91. Spiethoff, A. (1955): Die wirtschaftlichen Wechsellagen. Aufschwung, Krise, Stockung . Mit einer Einleitung von Edgar Salin. Tübingen: J.C.B. Mohr (Paul Siebeck). Taylor, J.B. and Woodford, M. (eds.) (1999): Handbook of Macroeconomics , Volume 1B. Amsterdam: North Holland. 2 Business Cycle to 2008’s crisis How system dynamics can help the economists to understand financial crisis 1 Arnaud Diemer A large number of models have been developed by economists to understand economic growth, economic fluctuations, Business Cycles, long wave, and eco-nomic and financial crises. Each model is usually concerned with some part of the economy and makes different assumptions on the processes that influence that part. In 1923, Joseph Kitchin considered that the movements of economic factors (price and volume) were composed of minor cycles averaging 3½ years in length, major cycles (so-called trade cycles) which are merely aggregates, usu-ally of two, and fundamental movements or trends which are largely straight-line movements. In 1935, Kondratieff argued that the dynamics of economic life in the capitalist social order was not of a simple and linear nature, but rather of a complex and cyclical character. He assumed the existence of long waves of an average length of about 50 years in the capitalist economy. In 1937, Kal-ecki proposed a theory of the Business Cycle focused on investment processes (closely allied to the Keynesian theory).

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  The New Regional Economies

  The US Common Market and the Global Economy

  • William R. Barnes, Larry C. Ledebur(Authors)
  • 1997(Publication Date)
  • SAGE Publications, Inc

    (Publisher)

  C H A P T E R Business CycleS AND LOCAL ECONOMIES Economic theory and federal policy appear to assume (a) that there is a single national economy, (b) that there are uniform regional responses to federal macroeconomic policies, and (c) that variations in regional Business Cycles and their responses to national policies are not the concern of national policy and can safely be ignored. Policies targeted to regions or industries are dismissed as structural and considered by mainstream economists not to be an appropriate means of promoting cyclical stabilization. If there is a single national economy, however, and if regions respond uniformly to federal macroeconomic policies, then the Business Cycles experienced by regions should conform to the pattern of the national Business Cycle and, hence, to one another. The national Business Cycle and regional fluctuations, measured by rates of change in cyclical indi-cators, should be one and the same or similar enough that they would not matter. 49 50 THE NEW REGIONAL ECONOMIES Business Cycles have been the nemesis of industrial economies. Karl Marx predicted the ultimate collapse of capitalism through successive and increasingly severe cycles of boom and bust. The promise of Keynesian economics was its potential to moderate these recurrent cycles of depression and expansion. Mainstream economics since the 1930s and federal economic policy since the 1960s have focused on means to control cyclical instability and promote stable, long-term national economic growth. The youthful art of macroeconomics tends not to deal with differ-ences in the timing and severity of Business Cycles across regions or with differences in the responsiveness of regional cycles to federal fiscal and monetary policies. The only interest in regional differences has focused on the possibility of using regions that tend to lead the national cycle as a means of forecasting national trends.

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