m




m


 
? Deviation from trend growth (i.e. fluctuations in
GDP around its trend)
? A business cycle is a sequence of economic activity
in a nation's economy that is typically characterized
by four phases that repeat themselves over time.
? Economists note, however, that complete business
cycles vary in length. The duration of business
cycles can be anywhere from about two to twelve
years, with most cycles averaging about six years in
length.
? But the term "business cycle" is still primarily
associated with larger (regional, national, or
industry wide) business trends.
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? Expansion
? Peak
? Contraction
? Trough
 w




? The expansion phase of the business cycle represents a
period of economic growth.
? This phase includes an increase in the number of jobs
available and an increase in the cost of goods.
? Employers expand their ranks of employees, a
corresponding increase in earned income enables working
consumers to afford items produced by businesses.
? Businesses produce more goods during the expansion stage
of the business cycle.
? During an expansion stage, an economy normally produces
a GDP indicating high levels of efficiency.
 d

? The peak stage follows an expansion phase.
? The peak stage demonstrates the height, the pinnacle of
the expansion phase.
? In a peak phase, an economy experiences little or no
unemployment.
? The cost of goods continues to increase, but not as rapidly
as in the expansion phase, as production levels satisfy
consumers' demand for goods almost exactly.
? The business cycle's peak stage reveals a high GDP during
its length.
? An economy's peak stage is normally recognized after it has
ended, however. Only a decrease in GDP distinguishes a
peak stage from its predecessor, the expansion phase.
 
 
 

? The contraction phase of the business cycle represents the
opposite of the expansion stage.
? Employers cause an increase in an economy's
unemployment by reducing the number of their
employees.
? Workers lose their jobs, earned income decreases and non-
working consumers can no longer afford goods produced
by businesses.
? An economy's GDP will be lower during the business
cycle's contraction phase than during the cycle's expansion
and peak stages.
? If GDP falls for consecutive quarters, the contraction stage
experienced by an economy may be a recession.
 3

? The business cycle's trough stage directly contrasts its peak
phase.
? During a trough stage, an economy experiences a high
unemployment rate.
? Increases in the cost of goods do not occur as consumer
demand and confidence levels remain low.
? Similar to a peak phase, a trough stage can only be
recognized after it passes.
? A trough stage will be identified by a decrease in an
economy's GDP when compared with its level during the
preceding contraction phase.
? If an economy's GDP decreases or remains at a low level for
an extended number of fiscal quarters, the economy's
trough stage may be a depression.


 


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Ôecurrent, systematic fluctuations in the
level of business activity:
? real GDP growth rate
? inflation
? unemployment


 


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6

 



d
 3
 d


 
 
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d 






 

 

 




 

 


 



 



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? ºolatility of investment spending
? Momentum
? Technological innovations
? ºariations in inventories
? Fluctuations in government spending
? Politically generated business cycle
? Monetary policies
? Fluctuations in imports and exports
 
m


 3

? Both growth and business cycles are caused by
aggregate supply shocks
? Business cycles are outcome of optimizing market
mechanism
? aggregate demand is endogenous
? No role for government in changing the nature of
business cycles
 K


ÿ Prices and wages may be sticky ǥ may not adjust to
equilibrate markets
ÿ Conduct V
VVV 
 
 

  
[ Business cycle largely the result of destabilizing
movement in aggregate demand
[ New Keynesians also acknowledge aggregate
supply shocks matter
ÿ Government must step in to shore up aggregate
demand ǥ policy can alter the business cycle.



m


 

 



? Procyclical - with the cycle. Increases during
expansions and declines during contractions

? Countercyclical - goes against the cycle

? Acyclical - no observable relation to the cycle




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3
? Coincident - matches the cycle. Peaks and troughs
occur at roughly the same time.

? Lagging - peaks and troughs follow a few months

later.

? Leading - peaks and troughs occur before those of

the cycle.
K




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? Flexibility:
Part of growth management is a flexible business plan
that allows for development times that span the entire
cycle and includes alternative recession-resistant funding
structures.
? Attention to Customers:
This can be especially important factor for businesses
seeking to emerge from an economic downturn. Staying
close to the customers is a tough discipline to maintain in
good times, but it is especially crucial coming out of bad
times. "Your customer is the best test of when your own
upturn will arrive. Customers, especially industrial and
commercial ones, can give you early indications of their
interest in placing large orders in coming months."
K




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? Objectivity:
Small business owners need to maintain a high
level of objectivity when riding business cycles.
Operational decisions based on hopes and desires
rather than a sober examination of the facts can
devastate a business, especially in economic down
periods.
? Long-Term Planning:
Consultants encourage small businesses to adopt a
moderate stance in their long-range forecasting.
K




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? Study:
Timing any action for an upturn is tricky, and the
consequences of being early or late are serious. For
example, expanding a sales force when the markets don't
materialize not only places big demands on working
capital, but also makes it hard to sustain the motivation of
the sales-people. If the force is improved too late, the cost
is decreased market share or decreased quality of the
customer base. To strike the right balance between being
early or late a company needs to listening to economists,
politicians, and media to get a sense of what is happening is
useful, but it is unwise to rely solely on their sources. The
best route is to avoid trying to predict the upturn. Instead,
listen to your customers and know your own response-time
requirements.
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