The business cycle Flashcards
What is macroeconomics?
The study of the performance of the economy as a whole and the policies used to improve that performance
What is microeconomics?
Studies the behaviour of individual agents
Australia’s GDP increase (1959-2013) and annual rate
Australia’s GDP grew form $220 billion in 1959-60 at an average annual rate of 3.2% to reach 1600 billion in 2013-14 (a seven-fold increase)
When were there periods of rapid growth and slow growth?
The economy has had periods of rapid growth (e.g. the late 1960s; 1983-1986; 1998; 2007) and slow growth (e.g. 1983; 1991; 2000; 2008)
What is the business cycle?
The cycle of booms and troughs is known as the business cycle
What are the characteristic of the business cycle?
- Boom
- Recession
- Trough
- Upswing
Equation for rate of change
(year 1)-(year 2)/(year 1) ×100
When do booms occur?
Occur when the level of economic activity is higher than normal. The level of aggregate expenditure is at, or beyond, the level required for full employment of productive resources.
Features of a boom?
- A general feeling of confidence throughout the economy
- High levels of consumption expenditure, particularly on durable foods and luxuries
- High levels of profitability in the business sector
- A high level of utilisation of productive capacity, perhaps with bottlenecks in some sectors
- Relatively low cyclical unemployment
- Higher levels of labour participation in the workforce
- Inflationary pressures
- High levels of borrowing
During the contraction phase, what to businesses sense?
Businesses sense that they have enough capacity to meet anticipated demand
- Further investment would carry greater risk
- The increased levels of consumer spending that drove investment and output may now result in price increases as the economy reaches capacity
- Bottlenecks (shortages of labour or productive capacity) may occur in some industries
What happens to income, output and expenditure (contraction)
Increases in income, output and expenditure that characterised the boom start to level off
What happens to confidence and expectations?
Slower growth in spending output and income starts to spread throughout the economy, and it feels as if the economic climate has deteriorated
These events give rise to uncertainty as consumers and firms adjust their expectations about the future and change their planned spending as a result.
Government policy (contraction - effects)
- Designed to restrain high economic activity though monetary policy
- Increased interest rates discouraged borrowing and consumer spending on durable goods
How might the downswing appear dramatic?
If it is accompanied by sharp declines in confidence or falling asset values
When does a trough occur?
When the level of aggregate expenditure (income, consumption and investment) is below the economy’s potential
Characteristics of a trough
- Higher levels of cyclical unemployment
- Reduced company profits
- Lower sales of consumer durables
- Lower levels of consumer and business confidence
- Reduced pressure on prices
- Higher savings rates
- Lower interest rates
- Lack of confidence and reluctance to spend
Why do expansions occur?
Due to the fact that the economic trough cannot continue indefinitely
What happens to productive machinery? (upswing)
Productive machinery is eventually worn out and replacement, bringing on new investment.
- Businesses begin to innovate with new products and more efficient processes as they try to attract buyers, and try to gain a competitive advantage over their rivals
What happens to the level of economic activity and confidence?
The level of economic activity and confidence gradually rises as the economy resumes its long term growth path
What happens to investment expenditure?
- Creates the capacity that firms use to produce final goods and services
- At some point, investment starts to slow because firms think the return is unlikely to justify the risk of purchasing new capital equipment
Average lengths of the business cycle
The average length of a business cycle between 1960 and 2011 was 52 months.
- Average duration of the contraction period was 19 months
- Average duration of the expansion period was 32 months
Examples of exogenous factors?
external factors – drought, flood or war
What are economic indicators?
Economic indicators refer to data or information that helps us describe and measure the current state of the economy.
Indicators expose trends and help to forecast economic events in the future
What is GDP?
The total value of new final goods and services produced in the country during the year.
Examples of narrow indicators
- The consumer price index
- Average weekly earning
- Labour force and unemployment statistics
- Business spending on capital equipment
Government institutions that publish statistics
- The Treasury
- Australian Bureau of Statistics
- Australian Bureau of Agricultural and Resource Economics and Sciences
Private organisations that collect economic data
- Major banks
- The economic faculties of major universities
- The chamber of commerce and industry
Types of indicators?
- Leading
- Coincident
- Lagging
Leading indicators?
- Predict changes in economic activity
- We would expect them to change before the direction becomes evident in the rest of the economy
Examples of leading indicators
- building approvals
- share prices
- levels of inventory held by firms
- employment vacancies
- levels of business confidence
- consumer sentiment
Coincident indicators
- move in line with the level of economic activity
Examples of coincident indicators
- manufacturing output
- production of building materials
- sales of consumer durables
- retail sales
- interest rates
- growth of real GDP
Lagging indicators
- not expected to show any change until after trends in the rest of the economy have been confirmed
- react to developments that occurred sometime in the past
Examples of lagging indicators
- Unemployment levels
- Savings bank deposit levels
- Consumer debt levels
What are pro-cyclical indicators?
Move in the same direction as the level of economic activity such as gross domestic product
What are counter-cyclical indicators
Move in the opposite direction to the economy such as unemployment levels because they rise as economic activity slows.
