THE BUSINESS CYCLE
Upswing: expansion phase
Downswing: contraction phase
Trend Line: Generally grows over time. Higher the gradient, more economic growth @faster
pace. Rate = one year’s growth vs. another year’s growth.
Recovery: Starting from trough increasing
Prosperity: From trend line increasing before peak
,Recession: Two or more consecutive quarters of negative growth. E.g Jan-Mar = -1% & Apr-Jun
= -2%.
Depression: Two or more years of world wide negative growth resulting in unemployment,
poverty etc.
Length: Duration of one cycle from peak to peak / trough to trough (think of it as ‘domain’ like in
maths)
Amplitude: How ‘deep’ business cycle went. Peak to trough. Think of it as ‘range’ like in maths.
*peak and trough = points
*recession, depression, recover, prosperity = phases
CHARACTERISTICS OF PROSPERITY
> consumer spending increases
-more money flow & salaries
> decreases unemployment
> more production / more profits
> rand weakens
-due to more imports
> inflation increases
-due to scarcity
> Restrictive fiscal policy
-Enoch Godongwane
-increases taxes
-decrease gov. spending
> Restrictive monetary policy
-increase interest rates
-decrease money supply:
-sell gov. Bonds
-increase cash reserve requirement
-discourage credit (moral persuasion)
^CHARACTERISTICS OF DEPRESSION = vice versa^
Extrapolation: using historical data to predict the future on that basis
Moving Averages: a method of extrapolation, which is calculated by creating a series of
averages of different subsets of a full data set.
- Purpose = to smooth the business cycle in order to get a better picture of the general
trend.
,2 Causes of The Business Cycle
1. exogenous
Outside factors that affect the business cycle
- Developing countries more vulnerable due to large primary industries (no rain =
no farming)
- Examples include:
- natural disasters
- technological development
- oil price
- political development
- change in economic conditions in major trade partner
- crisis e.g terrorist attacks
2. endogenous
Factors inside/within the economic system/market that cause economic fluctuations
- Examples include:
- Monetary causes: money supply, availability of credit, monetary policy
- Psychological causes (optimist/pessimist entrepreneurs)
- Keynesian School of Thought: John Keynes. Market unstable so government
must intervene.
- Opposing School of Thought (Classic School of Economics - Milton Friedman &
Frederick van Hayack).
- Market stable, so government intervention creates instability.
Monetary and Fiscal Policy: contractionary vs expansionary
Monetary: any measure taken by the SARB to influence the supply of money and interest rates,
with a view to maintain stable prices, in the interest of sustainable economic growth.
Fiscal Policy: the government’s use of taxation, government spending and borrowing to achieve
the economic objectives of the state.
Expansionary fiscal = fiscal stimulus
*Fiscal policy has to be coordinated with the monetary policy else the one type of policy may
counteract the effects of the other type of policy.
The Reserve Bank's Monetary Policy Committee (MPC) meets six times a year to determine
the repurchase (repo) rate. During their meetings, they analyse a considerable amount of
economic information and then decide whether the repo rate should go up, go down or stay
constant.
*may be asked to analyse and then must give practical answer that people who do not have
faith in the economy may not make bigger purchases and commit to paying off their debt over
time.
, Fiscal and Monetary policies are seen to cause business cycles rather than eliminate them. Gov
often use them to meet their political objectives. Monetary policy should focus on controlling
inflation (3-6%) and Fiscal should focus on low taxes and balanced budget.
SA’s macro economic objective:
● Low inflation / price stability
● Positive economic growth
● Surplus on the Balance of Payments
● Low unemployment or full employment
● Fair distribution of income
Three Types of Economic Indicators
Leading: Leading economic indicators are indicators that change before the economy changes.
A leading indicator changes before the economy starts to follow a particular pattern or trend.
Leading indicators are considered to point toward future events. Leading economic indicators
are useful for investors as they help predict what the economy will be like in the future.
Lagging: Lagging economic indicators do not change direction until a few quarters after the
economy does. Lagging indicators are seen as confirming a pattern that is in progress.
Coincident: Coincident economic indicators move at the same time as the economy does.
Coincident indicators occur in real-time and clarify the state of the economy.
Leading indicators Coincidental Indicators Lagging Indicators
Number of new cars sold Unemployment figures Number of hours worked in
construction
New companies being Real GDP Number of commercial
registered vehicles sold
Building plans approved Retail Sales Real investment in machinery
and equipment
Share prices / stock market Utilisation of production Cement sales in ton
returns capacity
Business confidence index Industrial production index Unemployment rate
Product exports Product imports Relation of stock to sales
Upswing: expansion phase
Downswing: contraction phase
Trend Line: Generally grows over time. Higher the gradient, more economic growth @faster
pace. Rate = one year’s growth vs. another year’s growth.
Recovery: Starting from trough increasing
Prosperity: From trend line increasing before peak
,Recession: Two or more consecutive quarters of negative growth. E.g Jan-Mar = -1% & Apr-Jun
= -2%.
Depression: Two or more years of world wide negative growth resulting in unemployment,
poverty etc.
Length: Duration of one cycle from peak to peak / trough to trough (think of it as ‘domain’ like in
maths)
Amplitude: How ‘deep’ business cycle went. Peak to trough. Think of it as ‘range’ like in maths.
*peak and trough = points
*recession, depression, recover, prosperity = phases
CHARACTERISTICS OF PROSPERITY
> consumer spending increases
-more money flow & salaries
> decreases unemployment
> more production / more profits
> rand weakens
-due to more imports
> inflation increases
-due to scarcity
> Restrictive fiscal policy
-Enoch Godongwane
-increases taxes
-decrease gov. spending
> Restrictive monetary policy
-increase interest rates
-decrease money supply:
-sell gov. Bonds
-increase cash reserve requirement
-discourage credit (moral persuasion)
^CHARACTERISTICS OF DEPRESSION = vice versa^
Extrapolation: using historical data to predict the future on that basis
Moving Averages: a method of extrapolation, which is calculated by creating a series of
averages of different subsets of a full data set.
- Purpose = to smooth the business cycle in order to get a better picture of the general
trend.
,2 Causes of The Business Cycle
1. exogenous
Outside factors that affect the business cycle
- Developing countries more vulnerable due to large primary industries (no rain =
no farming)
- Examples include:
- natural disasters
- technological development
- oil price
- political development
- change in economic conditions in major trade partner
- crisis e.g terrorist attacks
2. endogenous
Factors inside/within the economic system/market that cause economic fluctuations
- Examples include:
- Monetary causes: money supply, availability of credit, monetary policy
- Psychological causes (optimist/pessimist entrepreneurs)
- Keynesian School of Thought: John Keynes. Market unstable so government
must intervene.
- Opposing School of Thought (Classic School of Economics - Milton Friedman &
Frederick van Hayack).
- Market stable, so government intervention creates instability.
Monetary and Fiscal Policy: contractionary vs expansionary
Monetary: any measure taken by the SARB to influence the supply of money and interest rates,
with a view to maintain stable prices, in the interest of sustainable economic growth.
Fiscal Policy: the government’s use of taxation, government spending and borrowing to achieve
the economic objectives of the state.
Expansionary fiscal = fiscal stimulus
*Fiscal policy has to be coordinated with the monetary policy else the one type of policy may
counteract the effects of the other type of policy.
The Reserve Bank's Monetary Policy Committee (MPC) meets six times a year to determine
the repurchase (repo) rate. During their meetings, they analyse a considerable amount of
economic information and then decide whether the repo rate should go up, go down or stay
constant.
*may be asked to analyse and then must give practical answer that people who do not have
faith in the economy may not make bigger purchases and commit to paying off their debt over
time.
, Fiscal and Monetary policies are seen to cause business cycles rather than eliminate them. Gov
often use them to meet their political objectives. Monetary policy should focus on controlling
inflation (3-6%) and Fiscal should focus on low taxes and balanced budget.
SA’s macro economic objective:
● Low inflation / price stability
● Positive economic growth
● Surplus on the Balance of Payments
● Low unemployment or full employment
● Fair distribution of income
Three Types of Economic Indicators
Leading: Leading economic indicators are indicators that change before the economy changes.
A leading indicator changes before the economy starts to follow a particular pattern or trend.
Leading indicators are considered to point toward future events. Leading economic indicators
are useful for investors as they help predict what the economy will be like in the future.
Lagging: Lagging economic indicators do not change direction until a few quarters after the
economy does. Lagging indicators are seen as confirming a pattern that is in progress.
Coincident: Coincident economic indicators move at the same time as the economy does.
Coincident indicators occur in real-time and clarify the state of the economy.
Leading indicators Coincidental Indicators Lagging Indicators
Number of new cars sold Unemployment figures Number of hours worked in
construction
New companies being Real GDP Number of commercial
registered vehicles sold
Building plans approved Retail Sales Real investment in machinery
and equipment
Share prices / stock market Utilisation of production Cement sales in ton
returns capacity
Business confidence index Industrial production index Unemployment rate
Product exports Product imports Relation of stock to sales
