The Business Cycle Flashcards
Downturn / contraction
A decline in economic activity
Upturn / expansion
An increase in economic activity
Expectations
Beliefs about what will happen in the future
Consumption
Purchasing and using goods and services
Balance of payments
The difference between the funds country earns and those it pays for all international transactions
Gross domestic product
The total market value of all goods and services produced in a country during a given period
It counts all of the output generated within the borders of a country or a region.
Supply and demand
The willingness and ability of consumers to purchase goods and services
The willingness and ability of businesses to offer goods and services for sale
The business cycle/ trade cycle
shows how a nation’s real GDP fluctuates over time
A boom
A long period of expansion
A recession
A downturn that lasts more than 6 months
2 or more consequtive quarters of negative economic
growth
a depression or slump
A downturn that lasts for a year or 2
a peak
The highest point on a business cycle
a trough / bottom out
The lowest point on the business cycle
What is a negative growth
Contraction/decline
NBER
National Bureau of Economic Research
4 phases of business cycle
1 peak (boom)
2 recession (depression)
3 trough
4 recovery - expansion
economic trends in recession (4)
– Consumer spending slows
– Inventories build up
– Companies reduce output & layoff employees
– Unemployment rises
economic trends during a recovery (5)
– Activity accelerates
– Consumer spending improves
– New orders are placed
– Companies increase output & add employees
– Unemployment declines
RECESSION 7
businesses make fewer sales
companies earn less revenue
businesses cut back on output
The number of people on payrolls is reduced
unemployment rate goes up
eventually* GDP reaches a trough
consumers spend less money
EXPANSION 6
economic activity picks up again
excess inventories are used up
production is ramped up again
job opportunities improve
new orders are placed
sales improve
WHAT CAUSES EXPANSION?
- PEOPLE’S SPENDING = CONSUMPTION DECISIONS
= decisions on whether to spend, save, borrow… - SUPPLY AND DEMAND
- AVAILABILITY OF CAPITAL
WHAT CAUSES DOWNTURNS?
Demand higher than supply
-economy is overheating - inflation (rise in prices)
Spending goes down – production goes down – lay offs
People start saving and spending less
TWO THEORIES OF THE BUSINESS CYCLE:
THEY EXPLAIN WHAT CAN CAUSE THE BUSINESS CYCLE
INTERNAL (ENDOGENOUS) THEORY
Causes are in the economic activity
EXTERNAL (EXOGENOUS) THEORY
Causes are outside economic activity wars, unrest, elections, political shocks natural disasters
demographic changes
scientific and technological advances
