The Business Cycle

thank god cycle isn’t spelt with an “s”

Business Trade Cycle (BTC)

Describes fluctuations in the growth of real output, consisting of alternating periods of expansion (increasing real output) and contraction (decreasing real output)
A business cycle plots real GDP on the vertical axis, against time on the horizontal axis
GDP here is measured in real terms, so that the vertical axis measures changes in the volume of output produced after the influence of price-level changes has been eliminated

An expansion occurs when there is positive growth in real GDP, shown by these parts of the curve that slope upwards
During periods of real GDP growth, employment of resources increases, and the general price level of the economy (which is an average over all prices) usually begins to rise more rapidly (this is known as inflation)

A peak represents the cycle’s maximum real GDP, and marks the end of the expansion
When the economy reaches a peak, unemployment of resources has fallen substantially, and the general price level may be rising quit rapidly.
- The economy is likely to be experiencing inflation

Following the peak, the economy begins to experience falling real GDP (negative growth), shown by the downwards sloping parts of the curve
If the contraction lasts 6 months (2 quarters) or more, it is termed a recession, characterised by falling real GDP, and growing unemployment of resources
Increases in the price level may slow down a lot, and it is even possible that prices in some sectors may begin to fall
Deflation: outright fall in prices
Disinflation: rising general prices at a falling rate

A trough represents the cycle’s minimum level of GDP, or the end of the contraction
There may now be widespread unemployment
A trough is followed by a new period of expansion (also known as a recovery), marking the beginning of a new cycle

An indicator is anything that can be used to predict future financial or economic trends
For example, the social and economic statistics published by accredited sources, such as the various departments in the government, are indicators
Some of the popular indicators they put out include unemployment rates, housing stats, inflationary index, and consumer confidence
Official indicators must meet certain set criteria; there are three categories of indicators, classified according to the types of predictions they make

Signal future events
Bond yields are thought to be a good leading indicator of the stock market because bond traders anticipate and speculate trends in the economy (even though they aren’t always right).
New housing starts, money supply, and M2 are considered good leading indicators.

Share prices
1. Share prices go up in response to an increase in demand
2. Indicates company performance
Building approvals
1. More building approvals - more demand for building
Levels of stock (inventory) held by firms
1. If inventory level rises, demand rises
2. If inventory level falls, demand is falling
Manufacturers new orders
Business and consumer confidence
1. Falling confidence means falling growth
Consumer expectations
New employment vacancies
New business start-ups

One that follows an event
The importance of a lagging indicator is its ability to confirm that a pattern is occurring.
Unemployment is one of the most popular lagging indicators.
If the unemployment rate is rising, it indicates that the economy has been doing poorly.
Another example of a lagging indicator is the Consumer Price Index (CPI) which measures changes in the inflation rate.

Occur at approximately the same time as the conditions they signify
Change at the same time as the economy/stock market
Personal income is a coincidental indicator for the economy: high personal income rates will coincide with a strong economy.
The gross domestic product (GDP) of an economy is also a coincident indicator.