Business Cycle

Is the economy getting better or

worse?
Micro vs. Macro

Microeconomics: The study of personal or

small finances.
!
Individuals families or businesses

Macroeconomics: The study of economic

systems on a large scale
!
"ational or #lobal economies
#ross $omestic %roduct

$ef. The total value in dollars of all final

goods and services produced within the
nation each year

&bbreviated as the #$%

'hat does the #$% tell us?

If the #$% is larger than last year the

economy is e(panding )getting bigger*

If the #$% is smaller the economy is

shrin+ing )getting smaller*
Business Cycle

The Business Cycle allows people to

understand the direction the economy
)#$%* is going )growing or shrin+ing* and
plan accordingly.

The economy follows the Business Cycle

regularly.
%hases of the Business Cycle
,(pansion )#rowing*
%ea+ )Top*
Contraction )-hrin+ing*
Trough )Bottom*
Business Cycle
,
(
p
a
n
s
i
o
n
%ea+
C
o
n
t
r
a
c
t
i
o
n
Trough
,
(
p
a
n
s
i
o
n
%ea+
C
o
n
t
r
a
c
t
i
o
n
,(pansion

$uring a period of e(pansion:

!
'ages increase
!
.ow unemployment
!
%eople are optimistic and spending money
!
/igh demand for goods
!
Businesses start
!
,asy to get a ban+ loan
!
Businesses ma+e profits and stoc+ prices
increase
%ea+

'hen the economic cycle pea+s:

!
The economy stops growing )reached the top*
!
#$% reaches ma(imum
!
Businesses can0t produce any more or hire
more people
!
Cycle begins to contract
Contraction

$uring a period of contraction:

!
Businesses cut bac+ production and layoff
people
!
1nemployment increases
!
"umber of 2obs decline
!
%eople are pessimistic )negative* and stop
spending money
!
Ban+s stop lending money
Trough

'hen the economic cycle reaches a

trough:
!
,conomy 3bottoms4out5 )reaches lowest point*
!
/igh unemployment and low spending
!
-toc+ prices drop
But when we hit bottom no where to go but
up6
1".,--7.
8ecession9$epression

& prolonged contraction is called a

recession )contraction for over : months*

& recession of more than one year is

called a depression
'hat +eeps the Business Cycle
#oing?

; variables cause changes in the

Business Cycle:
<. Business Investment
'hen the economy is e(panding sales and
profit +eep rising so companies invest in
new plants and e=uipment creating new
2obs and more e(pansion. In contraction the
opposite is true
'hat >eeps the Business Cycle
#oing?
?. Interest 8ates and Credit
.ow interest rates companies ma+e new
investments adding 2obs. 'hen interest
rates climb investment dries up and less 2ob
growth
@. Consumer ,(pectations
Aorecasts of an e(panding economy fuels more
spending while fear of a recession
decreases consumer spending
'hat +eeps the Business Cycle
#oing?
;. ,(ternal -hoc+s
,(ternal -hoc+s such as disruptions of the oil
supply wars or natural disasters greatly
influence the output of the economy
,(. <BB?4?CCC was the longest period of
e(pansion in 1.-. history. ,arly in ?CC<
signs of contraction appeared though the
Bush administration denied it. The -ept. <<
th

?CC< terrorist attac+s =uic+ly caused the
business cycle to shift into a contraction.
'ho Cares?????

'hy should you care about the business

cycle and economy?

.ots of reasons6
3$on0t =uit that 2ob65

If the economy is going into a contraction

2obs will become more scarce. If you =uit
you may not find another 2ob6

But if the economy is in a period of

e(pansion 2obs are readily available. It
may be a good time to switch careers.
3-hould I ma+e a big purchase?5

Dnly if you +now that you won0t lose your

2ob in a contraction. -o buy your house
during an e(pansion.
/D',E,8

'hen the economy starts to slow down

)contraction* interest rates will decrease.
'ait to buy a house until the rates drop to
a low point if you are sure you won0t lose
your 2ob.
Fuic+ 8eview6

'hat phase of the business cycle do

wages go up?

,(pansion

'hat phase of the business cycle do

wages go down?

Contraction
8eview cont.

'hen are wages at their highest?

%ea+

'hen are wages at their lowest?

Trough
More 8eview

'hen will borrowing decrease?

Contraction

'hen will borrowing increase?

,(pansion

'hen will borrowing be at it0s lowest?

Trough
,ven More 8eview6

'hen will unemployment be at its lowest?

%ea+

'hen will business profits be the highest?

%ea+

'hen should you loo+ for a new 2ob?

,(pansion