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Understanding Business Cycles - Coggle Diagram
Understanding Business Cycles
Business Cycle Phases
Business cycle
is characteried by
fluctuations in economic activity
Real gross domestic product (GDP)
and
rate of umemployment
are
the key variables used to determine
the current phase of cycle
has 4 phases
expansion (real GDP is increasing)
features
growth in most sectors of the economy
, with
increasing employment, consumer spending and business investment
as
expension approaches its peak
, the
rates of increase in spending, investment, and employment slow but remains positive
, while
inflation accelerates
peak (real GDP stops increasing and begins decreasing)
contraction or recession (real GDP is decreasing)
declines in most sectors
with
inflation typically decreasing.
when t
he contraction reaches a trough
and
the economy begins a new expansion or recovery
=>
economic growth becomes positive, inflation is moderate
, but
employment growth may not start to increase until the expansion has taken hold convincingly
trough (real GDP stops decreasing and begins increasing)
common rule of thumb (theo kinh nghiệm) is to consider
2 consecutive quarters of growth in real GDP as the begining of an expansion
and
2 consecutive quarters of declining real GDP as the begining of contraction
they recur but not at regular intervals.
economies that are
mostly subsistence argiculture (tự cung tự cấp) or dominated by state planning
,
fluctuations in activity are not really " business cycle
" in the sense we are discussing here.
Resource use Fluctuation
inventories are important business cycle indicator.
firms try to
keep enogh inventory on hand to meet sales demand but dont want to keep too much of their capital tied up in inventory
=>
ratio of inventory to sales in many industries trends toward a normal level in times of steady economic growth
expansion is approaching its peak, sales growth begins to slow and unsold inventories accumulate
=>
increase
in
inventory sales ratio
above its normal level
increase in inventories
is
counted in GDP statistics whether the increase is planned or unplanned
=>
analyst who look at GDP growth rather then inventory sales ratio might seen economic strength rather than the begining of weakness
one of the ways
firms react to fluctuations in business activity is by adjusting their utilization of labor and physical captial
. Firms begin by changing how they utilize their current workers, producing less or more output per hour or adjusting the hours they work by adding or removing overtime.
Only when an expansion or contraction appears likely to persist will they hire or lay off workers
similarly, firms frist adjust their production level by using their existing physical capital more or less. as an
expension persists, firm will increase by investing more plant or equipment
.
During contractions, however firms will not necessarily sell plant or equipment immediately
Housing sector activity
is
a small part of economy relative to overall consumer spending
,
cyclical swings in activity in the housing market
can be large so that the effect on overall economic activity is greater than it otherwise would be
mortgage rates:
low interest rates tend to increase home buying and construction
while
high interest rares tend to reduce home buying and construction
Housing costs relative to income
incomes are cyclically high (low) relative to home costs
, including mortgage financing costs, home buying and construction tend to increase (decrease)
housing activity can decrease
even
when incomes are rising if home prices are rising faster than incomes
=>
decreases in purchase and construction activity in housing actor
speculative activity
rising home prices can lead to purchases based on expectations of further gians.
if falling prices that decreased or eliminated speculative demand and led to dramatic decreases in housing activity overall
Demographic factors
the proportion of population in the 25 to 40 year old segment is positively related to activity in the housing sector.
External Trade sector activity
the most important factors determining the level of a country's imports and exports
domestic GDP growth
increase growth leads to increases in purchases of foreign goods (import)
GDP growth of trading partners
exports depend on the growth rates of GDP of other economies
(especially those of important trading partners)
increasing foreign incomes increase sales to foreigners (exports)
and
decreasing economic growth in foreign countries decreases domestic exports
currency of exchange rate
increase in value of country' currency
makes its goods more expensive to foreign buyers and foreign goods less expensive to domestic buyers
, which
tend to decrease exports and increase import
currencies affect import and export volumes over time in respone to persistent trend in foreign exchange rates
rather than in
respone to short term changes which can be quite volatile
currency effects can differ in direction from GDP growth effects
and change in response to a complex set of variables
the
effects of changes in GDP levels and growth rates are more direct and immediate
business cycle characteristics
Trough
GDP growth rate
changes from
negative to positve
high unemployment rate
, increasing use of overtime and temporary workers
spending on consumer durable good
s and
housing may increase
Moderate or decreasing inflation rate
Expansion
GDP growth rate increases
unemployment rate decreases
as hiring accelerates
Investment increases in producers' equipment and home construction
Inflation rate may increase
Imports increase
as
domestic income growth accelerates
Peak
GDP growth rate decreases
Unemployment rate decreases but hiring slow
Consumer spending and business investment grow at slower rates
Inflation rate increases
Contraction/ Recession
GDP growth rate is negative
Hours worked decrease, unemployment rate increases
Consumer spending, home construction and business investment decrease
Inflation rate decreases with a lag
Imports decrease as domestic income growth slows
Theories of business cycle
Neoclassical school economists
believe
shifts in both AD and AS
are
primarily driven changes in techonoly over time
economy has a
strong tendency toward full employment equilibrium
the
great Depresion of 1930s didnot support the beliefs of the neoclassical
, the economy in the US operated significantly belows its full employment level for many years
Keynesian school economists
Keynes believed that
shifts in AD due to the changes in expectations were the primary cause of business cycles
believes these
fluctuations are primarily due to swings in the level of optimism
of those who run bussinesses
they overinvest and underinvest when they are too optimistic about the future growth in poteintal GDP and vice versa
policy prescription (đơn thuốc) is to
increase AD directly, through monetary policy
(increasing money supply) or
through fiscal policy
(increasing government speding, decreasing taxes or both)
New Keynesian school
added the asertion (xác nhận) that prices of productive inputs other than labor are also "downward sticky" - presingting
additional barriers to the restoration of full employment equilibrium
Monetarist school
believe the
variations in AD that cause business cycles are due to variations in the rate of growth of the money supply,
likely from
inappropriate decisions by the monetary authorities
recessions can be caused by external shocks or by inappropriate decreases in the money supply
to
keep AD stable and growing
,
central bank should follow a policy of steady and predictable increases in money supply
Austrian school
