Business Cycle Graph

11 Key excerpts on "Business Cycle Graph"

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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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  UFS BUSINESS SCHOOL EDITION ECONOMIC INDICATORS

  • P Mohr, D Yu, S Adendorff(Authors)
  • 2020(Publication Date)
  • Van Schaik Publishers

    (Publisher)

  67

  4

  Business cycles

  The first question people usually ask about the economy is: “What is happening to the economy?” or “How is the economy performing?” This is usually followed by “What is going to happen?”, “What are the country’s economic prospects?” or “Are we going to experience a recession?” All these questions relate to a phenomenon called the business cycle . In this chapter various aspects of the business cycle are discussed, including possible ways of forecasting economic activity.

  4.1 DEFINITIONS

  Economic growth (or decline) does not occur smoothly. Periods of rapid growth or expansion are invariably followed by periods of lower growth or decline. The business cycle refers to the fluctuations in the overall level or pace of economic activity. Sometimes also called the trade cycle , it can be defined as the pattern of expansion (recovery) and contraction (recession) in economic activity relative to its long-term trend. One complete cycle, which usually lasts a number of years, consists of four elements: a trough , an upswing or expansion (often called a boom ), a peak , and a downswing or contraction (often called a recession ). The different elements of the business cycle are illustrated in Figure 4-1 .

  A full cycle in aggregate economic activity is called a reference cycle . Thus, when people want to know whether the economy is in an expansionary phase or in a recession, they are inquiring into the position of the economy in terms of the reference cycle. Apart from the aggregate movement in economic activity, each individual time series (eg the physical value of agricultural production, the number of new motorcars sold, real merchandise imports) exhibits a cyclical pattern. In 68 contrast to the reference cycle, a specific 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)

  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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  Demystifying Global Macroeconomics

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

    (Publisher)

  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 To identify the phases of a business cycle, a nation needs to measure its real economic activity , but how is this done? Often, real GDP is used as a proxy. An increase in real GDP means that production is rising, which usually in-creases employment and improves economic conditions. Declining real GDP im-plies that the opposite is happening. The association between real GDP and the business cycle is so strong that the media and many analysts commonly define a recession as a decline in real GDP for at least two consecutive quarters. Even though this definition appeals to common sense, it is only a practical guideline (i.e., unofficial shortcut) and not the way recessions and expansions are officially measured or dated. 1 Business Cycle: Peak to Peak Economic Activity Peak Peak Trend line Trough Expansion Recovery Recession Contraction Time (Months) Figure 14.1: Recessions and Expansions During the Business Cycle. 1 To prove that the two-consecutive-quarters rule is a shortcut or approximation (and not an offi-cial rule) for defining recessions, we only need to look at historical records. From 1947 to 2019, the United States suffered 12 recessions. In 10 of them, real GDP fell for at least two consecutive quar-ters, but two official recessions (i.e., from April 1960 to February 1961 and from March 2001 to November 2001) occurred without real GDP falling for two consecutive quarters. There was one downturn in economic activity (from January to July 1947) during which real GDP fell for two con-secutive quarters without triggering an official recession. To understand who officially dates U.S. recessions, see “ Who Measures U.S.

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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)

  The NBER business cycle methodology identifies a business cycle based on the (absolute) downturn of the level of output. This is known as a classical business cycle . There is an alternative approach which considers the decline in the series measured as a deviation from its long-run trend. Following the terminology in Zarnowitz [211], such cycles are known as growth cycles . One advantage of using growth cycles is that they have expansions and contractions that are approximately of the same duration. By contrast, classical cycles typically have recessions that are shorter than expansions because of the growth effect. Figure 2.1 displays the difference between classical and growth cycles. Point A defines a trough for a classical cycle while point B defines a peak . By contrast, a trough occurs at point C for a growth cycle while point D defines a peak. When the economy is moving from a trough to a peak, we say that it is Fig. 2.1. Classical and Growth Cycles. 10 Business Cycles: Fact, Fallacy and Fantasy in an expansion , and a recession is said to occur when the economy is moving from a peak to a trough. The duration of the business cycle is the length of time (in months, quarters, or years) that the economy spends between two troughs or, equivalently, two peaks. The amplitude of a business cycle is the deviation from trend. The dating of business cycles for the US is done formally by the NBER Business Cycle Dating Committee. This committee uses data on real output, national income, employment, and trade at the sectoral and aggregate levels to identify and date business cycles. The turning points are determined judgmentally, although a computer algorithm exists that can approximate the results (see Bry and Boschan [49]). As an example, this committee recently announced that the US economy had formally been in a recession since December 2007. Table 2.1 gives the dates of business cycles or the so-called “reference dates” for the US economy since 1857.

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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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  Analysing Modern Business Cycles

  Essays Honoring Geoffrey H.Moore

  • Philip A. Klein(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Classical cycles historically have been the main concern of business cycle studies at the National Bureau of Economic Research (NBER) in New York. The NBER studies began with the work of Mitchell (1927; see Moore and Zarnowitz 1986). The classical cycle fits the business cycle theories of Kalecki (1939) and Schumpeter (1939). It also fits the hints Keynes (1936) offered about the nature of business cycles; and it is the cycle that is clearly at the heart of the post-Keynesian models of, for instance, Kaldor (1940) and Hicks (1950). Table 3.1 shows that there was no classical contraction in the United States between February 1961 and December 1969, a period of 106 months; Table 3.2 shows a classical upswing continuing in Australia from September 1961 to July 1974, a period of 154 months. The experience of the 1960s, especially in the United States with no classical downturn between 1961 to 1969, contributed to a revival of interest in growth cycles. 4 Growth cycles are defined as fluctuations in the rate of growth of aggregate economic activity, with periods when the growth rate is above the long-term trend rate alternating with periods when it is below this long-term value, but not necessarily negative. This enables account to be taken of the important fact that a slowdown may occur when the growth rate, though continuing positive, is slower than the long-term trend rate of growth. Hence excess capacity, notably unemployment, rises. On the other hand, during the expansion phase of the growth cycle, when excess capacity is being absorbed, the actual rate of growth is above the long-term trend rate of growth. Table 3.1 Phases of Business Cycles, U.S., 1948–87 Sources: a CIBCR 1988a. b U.S. Department of Commerce 1988, p

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  Schumpeter's Price Theory

  • Harry Bloch(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  Business cycle theory and statistical methods

  Mainstream economics generally treats business cycles as arising from external shocks to the economy. These shocks disturb equilibrium, but only temporarily, as markets adjust to the shocks through a self-equilibrating process. For Schum-peter, business cycles are not aberrations, but rather an inherent part of the process of economic evolution associated with the introduction and absorption of innovations. Innovations lead to booms as entrepreneurs compete for means of production, such that, ‘The recurring periods of prosperity of the cyclical movement are the form progress takes in capitalistic society ’ (Schumpeter, 1927, p. 30, italics in the original). Recessions, in turn, are part of the process of adjustment to structural change required by the innovations, as old ways of doing things are replaced by the new.

  Schumpeter’s theory of the business cycle is an essential component of his theory of economic development starting from the first edition of Theorie der wirtschaftlichen Entwicklung (Schumpeter, 1926 [1912]), the precursor to the edition used for the English translation in the Theory of Economic Development (TED ) (Schumpeter, 1961 [1934]). During the period from the mid-1920s to the mid-1930s, Schumpeter references this theory in a number of journal articles, both contrasting it to the contemporaneous theories of others (as in Schumpeter, 1927, 1930) and using it as the basis for explaining the unevenness of growth under capitalism (as in Schumpeter, 1928, 1935). In the process, he puts forward a number of arguments about the necessity of integrating theory, statistics and historical analysis to achieve a full understanding of business cycles.

  The culmination of Schumpeter’s research on business cycles is the two-volume Business Cycles (BC) , published in 1939. While the discussion of business cycles appears in the last chapter of TED , in BC the cyclical aspect of development takes centre stage. There is an extended discussion of each of the four cycle phases, prosperity, recession, depression and recovery, along with a discussion of a multiplicity of cycles of different lengths overlapping each other. BC also contains a discussion of the application of statistical method to the interpretation of cycles and trend in time-series data. Finally, the bulk of BC

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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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