Chapter 8 - Business Cycle Flashcards
what is the business cycle
the business cycle refers to the fluctuations in economic activity over time.
how to calculate GDP growth rate
GDP 2 - GDP 1 / GDP 1 * 100
What are the phases of the business cycle
Expansion, peak, contraction, trough
describe the expansion phase of the business cycle
the expansion is the longest phase of the business cycle, and is where economic activity is increasing. The beginning of an expansion occurs with the first of two consecutive quarters of real GDP growth. Expansions are usually 10 years in length (Aus was in expansion from 1991-2020). During expansion consumption and production increases, investment increases, business confidence and household confidence increases, real incomes rise, welfare increases. Expansions are often associated with increases in house prices, share prices.
describe the peak phase of the business cycle
the peak phase of the business cycle is the upper turning point of the business cycle. At a peak all the resources and labour are at maximum capacity hence, growth rate will be slow. At the peak, or boom, there are high levels of spending, high investments, high business and household confidence, low levels of unemployment. during peak, there is usually high levels of demand pull inflation as excess demand for goods and resources especially labour result in higher wages for businesses feeding into higher prices of goods and services. In response, the RBA will increase cash rate increasing interest rates resulting in lower inflation.
describe the contraction phase of the business cycle
The contraction phase is a period when the level of real GDP actually falls, or the growth rate of real GDP is negative. Recession is two consecutive quarters of negative economic growth. This means that real GDP has fallen for 6 months or more.
A deep and prolonged contraction is referred to as a depression.
Sharp falls in business and household confidence, high interest rates, low spending, low investment, lower incomes, lower expenditure, lower output by businesses,
describe the trough phase of the business cycle
The trough phase is teh lower turning point of the business cycle. low levels of spending and high levels of cyclical unemployment. labour force participation rate is very low as they feel they have lower prospects at finding employment. demand may fall and may result in periods of deflation where inflation is negative. low expectations, governmetn spending is usually high, low levels of spending and material income and welfare.
what are procyclical variables
are variables that move with the business cycle. E.g. consumer spending, employment, business investments, hiring.
what are coutercyclical variables
are variables that move against the business cycle. E.g. unemployment, government spending, business failures.
What are leading indicators
are indicators that change before the direction becomes evident in teh rest of the economy. Examples include share prices, building approvals, levels of inventory held by firms, business confidence. Share prices are the most well known leading indicators as they reflect what businesses are expected to earn, so when they increase, market is predicting output and business sales will increase.
what are coincident indicators
are indicators that moves in line with economic activity. Examples include factory production, employment, retail sales.
what are lagging indicators
are indicators that change sometime after the level of economic activity changes. Exampes include unemployment, inflation, wages, business profits.
