Economics
Economic Cycle
The economic cycle refers to the natural fluctuation of economic activity between periods of expansion and contraction. It is characterized by alternating phases of growth, peak, recession, and trough. These cycles are influenced by various factors such as consumer spending, business investment, and government policies, and they have a significant impact on employment, inflation, and overall economic health.
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10 Key excerpts on "Economic Cycle"
eBook - PDF- Kevin D. Hoover(Author)
- 2011(Publication Date)
- Cambridge University Press(Publisher)
5.2 The Business Cycle 143 Time Economic activity Peak Peak Trough Recovery: Definition 2 Recovery: Definition 1 Complete Cycle Complete Cycle Trend Slump Boom Recession Expansion Contraction Recovery Peak Trough Trough Figure 5.6. A Stylized Economic Time Series. The period from peak to trough is a recession (also known as a slump or contraction ). The period from trough to peak is known as an expansion (also known as a boom or recovery ). Recovery is sometimes used to indicate only a portion of the upswing, either: 1. the period from trough to the level of the previous peak; or 2. the period from trough to the level of the trend. A ( complete ) cycle is the period between a trough and the subsequent trough or a peak and the subsequent peak. measures of economic activity to move in concert suggests that there are common driving forces and that we can think not just about the trends and cycles of the individual measures, but of a business cycle. A reasonable defi-nition runs: The BUSINESS CYCLE is the alternation in the state of the economy of a roughly consistent periodicity and with rough coherence between different measures of the economy . 1 “Rough coherence” in this definition reflects the tendency of different economic time series to move up or down in closely related patterns. Saying that the economy-wide ups and downs are “roughly consistent” acknowl-edges the fact that, even though they are not evenly spaced, the pattern of ups and downs does not appear to be completely random: over the past 150 years, the average business cycle lasted four to five years; the shortest, less than two years; the longest, ten years. As with cycles in particular times series, business cycles are identified by their peaks and troughs (see Figure 5.6 ). A specialized language has devel-oped to describe business cycles. Key terms include: R ECESSION (synonyms: slump , contraction ): the period between the cyclical peak and the cyclical trough, when economic activity is falling .
eBook - ePub- (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.
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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.
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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.
eBook - PDFEconomics 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).
- 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.
eBook - PDF- 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
- Li Jianwei(Author)
- 2017(Publication Date)
- Routledge(Publisher)
1 Traditional Economic Cycle theories and their limitations The study of Economic Cycle originated in the nineteenth century. Economists found regular cyclical fluctuations in the process of economic development, among which the fluctuation of the absolute value of British economic aggreg- ates is the most remarkable. In 1921, Hayek defined the Economic Cycle as the circular deviation from economic equilibrium (Hayek, 1929). Since then econo- mists have been using this definition as the starting point of the study of the eco- nomic cycle. Later, the integration of Economic Cycle theory and economic growth theory led to the development of growth cycle theory, which is divided into two major groups – Keynesian and neoclassical theories. The neoclassical school believes the origin of the Economic Cycle is exogenous because a tempo- rary deviation of economic activities from the steady-state invalidates the effec- tiveness of government interventions. On the other hand, the Keynesian school argues that the economic growth cycle is endogenous, and government interven- tion can be effective in stimulating economic growth. The classical Economic Cycle theory Following the British economic crisis of 1825, the first generation of Economic Cycle theories, known as the “classical Economic Cycle theories,” emerged. The classical Economic Cycle theories mainly focused on the study of the circular fluctuations of economic aggregates, many of which regarded the Economic Cycle as fluctuations caused by exogenous factors. This approach lacks a system- atic and rigorous theoretical basis. Agricultural Economic Cycle and other exogenous Economic Cycle theories The early studies of the Economic Cycle in the nineteenth century treated it as exogenous. They believed that the Economic Cycle is rooted in the change of factors outside the economy and not affected by economic factors. One of the most influential theories was the agricultural Economic Cycle theory.
- Andrés Solimano(Author)
- 2020(Publication Date)
- Cambridge University Press(Publisher)
10 2 Recession and Depression An Overview of Theories and Empirics 2.1 Introduction Before continuing with the analysis of actual experiences of economic slumps (recessions and depressions), this chapter reviews main conceptual approaches to understand slumps and the interactions between policies, shocks, and recessionary cycles. 2.2 Business Cycles, Recessions, Depressions, and Recoveries The amplitude and duration of a whole business cycle can be measured from peak to peak or from trough to trough. In addition, a distinction is made between the phase of expansion of a cycle – running from trough to peak – and the phase of contraction (recession) that is measured from peak to trough (see Figure 2.1 ). A trend line often represents the medium-run evolution of output, around which we observe short-term fluctuations. Another way to see a business cycle is as a temporary deviation in the level of output (total Gross Domestic Product (GDP), per capita GDP, industrial production) from the trend (Figure 2.2a) or a more permanent reduction in the level of output (Figure 2.2b ). Empirically, using quarterly data, a common definition of a recession is a sequence of negative growth lasting for at least two consecutive quarters. 1 Some add to this definition an unemployment rate approach- ing 10 percent. If we use annual data, we may define a recession as at least a year of negative growth. Economists tend to distinguish between mild to moderate recessions and depressions, with the latter describing deep 1 See the methodology of the National Bureau of Economic Research of the United States. 11 2.2 Business Cycles, Recessions, Depressions, and Recoveries and protracted contractions in economic activity. Some may apply the term “depression” to permanent decelerations in output growth relative to some historical averages.
eBook - PDF- Michael K. Evans(Author)
- 2008(Publication Date)
- Wiley-Blackwell(Publisher)
Factors leading to cyclical fluctuations in these components of aggregate demand are covered in chapter 16. 3. Financial cycle business sectors continue to be frequent even though real sector cycles are not – and can still lead to business cycles. If fluctuations in interest rates and stock prices are large enough, they may cause a recession even if no other cyclical factors are present. The links between these two sectors – and the importance of fluctuations in financial markets in cyclical behavior – are covered in chapter 17. chapter fifteen Business cycles Introduction From 1854 through 1982, a contraction in economic activity in the US occurred about once every four years. From 1983 through 2000, there was only one minor downturn. Yet the 2001 experience proved that recessions are hardly a remnant of the past, and few economists would be willing to state that they will not reoccur in the future. Moderating business cycle fluctuations should be included among the principal problems to be solved in macroeconomics, along with reducing the rate of inflation and boosting the long-term growth in productivity. This chapter starts by recounting the long-term historical record of business cycles in the US economy. That is followed by an explanation of the typical pat- tern of business cycles, which are recurring, but not regular. In the post-WWII era, no downturn has lasted more than 16 months, while the length of the upturn has varied from 12 to 120 months. There is no particular method of determining in advance how long any given upturn will continue. After reviewing the historical record, the general nature of business cycles is briefly reviewed. The length and severity of the downturn depend not only on the initial disturbance, known as impulse, but on the degree to which those effects ripple through the economy, known as propagation.
eBook - PDF- 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).
eBook - PDFBuilding Cycles
Growth and Instability
- Richard Barras(Author)
- 2009(Publication Date)
- Wiley-Blackwell(Publisher)
This is because the explosive tendency generated by the lag mechanism is offset by the damping effect of the ceiling and floor thresholds. The crucial determinant of the period of the cycle is again found to be the length of the construction lag in the production of capital goods. As the first generation of business cycle models became more sophisticated, attempts were made to reverse the de-coupling of growth and cycles that had been a feature of both neoclassical and Keynesian theory. The non-linear models pro- posed by Goodwin and Hicks build in a simple exogenous growth trend through the assumption of an autonomous rate of investment driven by technical progress. Growth and Cycles: The Economic Debate 37 An alternative model that combines growth and cycles within a non-linear struc- ture was formulated by Smithies (1957). He introduced ‘ratchet effects’, such that consumption and investment not only depend on current income but also on the maximum level of income achieved in the past, so that a reduction in income leads to a less severe fall in demand. During the upswing of the cycle, these ratchet effects boost the growth in demand past the previous peak, at which point they become inoperable; during the downswing, they retard the fall in demand, creating a higher trough than in the previous cycle. Successively higher turning points thus introduce a growth trend into the cycle through the impetus provided by the ratch- ets, as past history influences the present in a hysteresis effect of the type discussed earlier in this chapter. The idea that cyclical fluctuations give impetus to economic growth through repeated surges in investment was developed by Kaldor (1954), who suggested a more fundamental sort of ratchet effect based on a Schumpeterian model of endog- enous technical progress in which bursts of innovation-led investment are followed by phases of accelerated obsolescence.
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