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Business cycles
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Chapter 2 Business cycles Business cycle is a time series measuring real GDP
Shows amount that output decreases or increases in each year
Time series shows the value of a variable over time
o A business cycle is a time series that shows what happens to the value of the domestic
output (GDP) of the economy over time
Most business cycles have similar patterns
GDP tends to rise and fall over time yet mostly increases are greater than
decreases
Measure GDP in:
Real terms: country’s total output of g/s adjusted for price changes / no inflation /
constant prices
Nominal terms: country’s total output in actual rands in a given year / current prices
, Components of a business cycle:
o The relationship between amount of output produced and the time is called the
business cycle
o Components include : peaks , troughs , length , amplitude and trend
Turning points (Peaks & Troughs):
Peaks // are the high points
Troughs // are the lowest points
As time passes both peaks and troughs get higher because output is
increasing
Periods of a business cycle (each length of the cycle consists of two periods):
o Downswing // movement from F-H. Output &economic activity decrease & divided into
recession & depression
Recession // banks cut back on lending to consumers & firms who respond by
reducing their spending therefor demand for output decreases. If producers
decrease output unemployment begins to increase, inflation starts to fall.
Depression // economic agents negative about future so banks stop lending,
larger fall in output , unemployment increases, price may fall.
o Upswing // movement from B-D. Output & economic activity increases, divided into
recovery & prosperity
Recovery // firms & consumers spend again because firms need to replace
capital, banks become more optimistic and are encouraged to increase lending
to economic agents. Therefore spending increases and output increases so
unemployment falls. Moves into a time of prosperity known as a BOOM
Prosperity // economic agents more optimistic, banks increase lending, larger
increases in output as demand increases. Unemployment decreases further, the
peak(turning point) is reached
Other characteristics of business cycle:
Length // measured from peak to peak , measures number of years it takes for economy
to get from one peak to another
Amplitude // vertical difference between trough and next peak , measure in GDP
Trend // relationship between GDP and time :
A trend can be:
Positively sloped = GDP is rising over time
Horizontal = GDP doesn’t change over time
Negatively sloped = GDP is falling over time
Types of cycle:
Kitchin inventory cycle 3-5yrs
Jugular fixed investment cycle 7-11yrs
Kuznets infrastructural investment cycle 15-25yrs
Kondratiev cycle 44-60yrs
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