...CAUSES OF BUSINESS CYCLES Internal Factors: 1. Consumption : When consumer spending increases, businesses will increase production- causing them to hire more workers and purchase more materials and capital goods. When consumer spending decreases, the opposite will occur. 2. Business investment : The purchasing of capital goods increases the number of jobs in the economy because people have to make those goods. If investments increases, the economy will grow, if investment decreases, the economy will contract. 3. Government activity : The government can influence the business cycle through fiscal policy (its tax and spend policies) and monetary policy (its control of the money supply, largely through the federal reserve). External factors 1. Inventions and innovation : Major changes in technology can influence the business cycle. Usually technological changes move the economy in a positive direction, but this is not always so. 2. Wars and political events : The impact of such events on the economy are very fact specific- in other words, difficult to generalize about. Phases of business cycle Expansion/Growth : During this phase of the business cycle, consumer and business spending rise. Unemployment will drop during this phase, which will further aid consumer spending. - During the period of revival or recovery, there are expansions and rise in economic activities. When demand starts rising, production increases and this causes an increase in investment...
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...In general the economy tends to experience different trends. These trends can be grouped as the business/trade cycle and may contain a boom, recession, depression and recovery. A business/trade cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real Gross Domestic Product (GDP) and other macroeconomic variables. Samuelson and Nordhaus (1998), defined it as ‘a swing in total national input, income and employment, usually lasting for a period of 2 to 10 years, marked by widespread expansion or contraction in most sectors of the economy’. These fluctuations in economic activity usually have implications on employment, consumption, business confidence, investment and output. The Keynesian Approach, this theory shows how the collaboration of multiplier and accelerator can lead to regular cycles in aggregate demand. The Keynesians believe that economic activity is generally unstable and is subject to inconsistent shocks, usually causing the economic fluctuations and are attributed to the changes in autonomous expenditures especially investment. The Keynesian approach is pretty simple; higher investment will lead to a larger rise in income and output in the short run. This means that consumers will spend some of their income on consumption goods. This will give rise to further increase in expenditure. Ceteris paribus an initial rise in autonomous investment produces a more than proportionate rise in income. The rise...
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...Definition The term ‘cycle’ means the recurrent variations in time series that usually last longer than a year and regular, neither in amplitude nor in length. The term ‘business cycle’ refers to economy-wide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (expansion or boom), and periods of relative stagnation or decline (contraction or recession).These fluctuations are often measured using the growth rate of real gross domestic product. According to A. F. Burns & W. C. Mitchell Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar characteristics with amplitudes approximating their own. According to A. F. Burns Business cycles are not merely fluctuations in aggregate economic activity. The critical feature that distinguishes them from the commercial convulsions of earlier centuries or from the seasonal and other short term variations of our own age is...
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...University of Frankfurt am Main Bachelor Seminar Business Cycle: Theory and Empirical Applications Country of interest: Netherlands Teacher: Prof. Ctirad Slavik Summer Semester 2013 Yisong Dong Student ID: 3903447 June 17.2013 Contents 1. Introduction……………………………………………………………………3 2. Data Work………………………...…………………………………………...3 2.1 2.2 2.3 2.4 2.5 Data……………………………………………………………………3 Detrending the data with Hodrick-Prescott Filter………………..……4 Basic Statistics for the detrended data………………………………...7 Construct the Solow residual without labor……………………...…..11 Construct the Solow residual with labor…………….………………12 3. Calibrating and simulating a simple stochastic RBC model…………………13 3.1 3.2 Two procedure for calibrating θ and calculating the I/K, K/Y and I/Y ratios……….…………………………………………………………13 Stimulation…………………………………………………………...16 4. Conclusion……………………………………………….………………...…21 References………………………………………………………………………..22 2 1. Introduction Business cycle refers to economy-wide fluctuations in production, trade and economic activity in general over several months or years in an economy organized on freeenterprise principles.1 It has been a well-documented feature of economic life for two centuries or more. Business cycle is the upward and downward movements of levels of GDP2 and refers to the period of expansions and contractions in the level of economic activities (business fluctuations) around its long-term growth trend.3 These fluctuations occur around...
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...Economic contractions, troughs, expansions and peaks are unpredictable phases of economic activity referred to as economic business cycles. The gross domestic product, or GDP, is the total market value of goods and services the country produces. As the economy goes through business cycle changes, these positively or negatively affect the GDP. Economic Contraction During a contraction, economic output slows, usually due to decreased demand for products and services, an increase in the cost of raw materials or both. This means that companies are not making as many products or offering as many services. As a result, companies will begin to lay off employees and the unemployment rate begins to rise. Since GDP is a measure of the value of economic output and during a contraction output decreases, the GDP also decreases. Even though the GDP decreases during a contraction, it is still positive. Economic Trough An economic trough occurs after a contraction. A historically high national unemployment rate and low economic output usually mark this trough, which often signals that the economy is already in or heading toward a recession. Unlike a contractionary phase in which the GDP decreases but is still positive, during a trough the GDP is negative. A negative GDP means that economic output does not grow at all. Economic Expansion After the "rock bottom" of an economic trough, expansion is its recovery. If the economy grows for two or three consecutive calendar quarters, it...
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...All businesses operate around certain business cycles. A business cycle refers to various trends that occur within a business or industry, such as growth or contraction. Often times, management decisions are impacted by where the company stands in reference to a particular cycle. Macro business cycles such as the general state of the economy also play an important role in management decisions. When the economy is in a cycle of retraction, management will act conservatively, whereas in a cycle of expansion, management may tend to act more aggressively to gain as much market share as possible. One of the main cycles business management will encounter in the life of a business is one that sees four, distinct trends: slowdown, bottom, growth and peak. All businesses, even the most aggressive sales organization on the planet, will experience these cycles. A slowdown occurs after a market has experienced a normal period of expansion. This is often followed by a period of sales maturity and product assimilation by the existing customer base, which is viewed as a slowdown. During a slowdown, competition has probably entered the market that has also created a dilution, or taken away from existing sales. Eventually the business hits a bottom or trough. After this bottom or trough period business gets aggressive and makes steps of expansion and marketing efforts to aggressively go after new market share. Following this period of expansion, business will again begin to see a peak in their...
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...We can say with great certainty that employee turnover is a concept which has been discussed a lot lately. It is normal part of every business cycle. In order to be able to analyze and discuss effects employee age has on employee turnover, definitions of these terms must be presented. According to Webster’s definition, employee turnover refers to the ratio of the number of workers that had to be replaced in a given time period to the average number of workers. Age represents one of the demographics characteristics every employee has. Other characteristics include gender, education, income, length of tenure. Simply said, these demographic characteristics refer to attributes of different employees. It is very important to note that different...
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...The Business Cycle The Business Cycle, is what caught Norma’s attention during the Week 4 chapter readings. Business cycles are the ups and downs of economic activity that can take place over several months or sometimes years (McConnell et al., 2009) No one business cycle is exactly the same in terms of their length and intensity. However, all cycles experience the same four phases: peak, recession, trough, and expansion (McConnell et al., 2009). The peak of the business cycle is where “the economy is near or at full employment and the level of real output is at or very close to the economy’s capacity (McConnell et al., 2009, p.521).” What goes up must come down, and that is true for the next phase called the recession distinguished by a period of reduction in total productivity, earnings, and employment lasting six months or more (McConnell et al., 2009). During the trough phase, the economy reaches the lowest levels of output and employment placing them in the middle of a depression (McConnell et al., 2009). Lastly, our present economy is in the midst of an expansion period “in which real GDP, income, and employment rise (McConnell et al., 2009, p.521).” According to the Bureau of Labor and Statistics website (2014), in October of this year, average hourly earnings rose by .01% while unemployment dropped 1.2% since the beginning of the year. The economy’s real GDP also increase by 3.9% in the third quarter of this year according to the Bureau of Economic Analysis website (2014)...
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...Name Professor Course Date: Analysis and Argument Essay on ‘Black Tuesday’ Stock Market Crash Financial systems both money markets and capital markets all across the world have always been susceptible to shocks of varying proportions. The stock markets for instance are very vulnerable to daily variations in the forces of demand and supply. That is, when supply of a given stock outweighs its demand, the price of that stock is expected to fall and when demand outstrips supply, the price is expected to rally. Though these changes are viewed as normal, at times the prices plummet to a level that it sets in a wave of panic among the investors (Rothman, Par 1). These panicking investors rush to liquidate their stocks leading to further dip in prices. Such huge falls in stock prices can lead to what we call a stock market crash. One of the most documented crashes in the world is the United States stock market crash of 29th October 1929 popularly known as the Black Tuesday. On that dreaded Tuesday Dow Jones had shed 13 % while eight weeks prior to that the bourse had lost 40 % of its value (Lancaster, par 2). This paper aims to analyze what happened on, before and after that Tuesday, what could have caused the crash and what measures can be taken to prevent future crashes. Prior to the 1929 crash, the United States of America had experience a period of stable economic growth. This was characterized by a period of improved industrial production, for instance mass production of cars...
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...BUSINESS CIRCLE THEORY INTRODUCTION. The term business cycle (or economic cycle or boom-bust cycle) refers to economy-wide fluctuations in production, trade and economic activity in general over several months or years in an economy organized on free-enterprise principles. The business cycle is the upward and downward movements of levels of GDP (gross domestic product) and refers to the period of expansions and contractions in the level of economic activities (business fluctuations) around its long-term growth trend. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (an expansion or boom), and periods of relative stagnation or decline (a contraction or recession).Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite being termed cycles, these fluctuations in economic activity can prove unpredictable. History A BASIC ILLUSTRATION OF ECONOMY/BUSINESS CIRCLE. Theory The first systematic exposition of periodic economic crises, in opposition to the existing theory of economic equilibrium, was the 1819 Nouveaux Principes d'économie politique by Jean Charles Léonard de Sismondi. Prior to that point classical economics had either denied the existence of business cycles, blamed them on external factors, notably war, or only studied the long term. Sismondi found vindication in the Panic of 1825, which was the first unarguably international...
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...ECS1260-65 ECONOMICS (FOR BUSINESS AND) MANAGEMENT 2012-13 Seminar Exercises 13 (to take place in Week 16 starting 11th February 2013) 1) Please say whether the following statements are true or false: a. An economy experiences growth if it produces more goods and services than the year before. (T) (An increase in the production means an increase in the GDP) b. Investment in physical capital means hiring more employees. (F) (Human capital is used for workforce) c. The convergence hypothesis asserts that poor countries grow slower than rich countries, thereby widening the income gap between the two sets of countries. (F) d. Trend output fluctuates around actual output, since it is latter that matters most. (F) (Actual output fluctuates around Trend output due to change in trends) e. Real business cycles assume that cycles reflect fluctuations around output, while political cycles reflect fluctuations around the political establishment. (T) ( f. In the business cycle, recession follows boom, and is followed by slump. (T) g. During recession, business profits increase. (F) Multiple Choice: 2) An increase in living standards generally takes place when: a) GDP grows vigorously over a long period of time. b) GDP declines only moderately. c) GDP is volatile. d) GDP long-term trend is flat. 3) Which of the following is NOT an example of an increased standard of living? a) Lower life expectancy. b) Indoor plumbing...
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...economy to keep increasing their revenue and decreasing their costs. The economy may go through a recession, expansion and peaks over their years in business. Larson, Inc. needs to analyze the difference scenarios and determine the best course of action for each type of economic future. Also, the company must consider the economy’s stage in the business cycle to make well-informed decisions. Economic projections The business cycle will have continual change and fluctuate over time. History has shown us how the economy goes through peaks, recessions, troughs, and expansion. It is important for all businesses to understand the concepts of macroeconomics and how the business cycle is affected. Larson, Inc. can plan for the changes to remain successful and innovative. The business cycle is determined by the changes in GDP or gross domestic product. The change in the GDP can occur from economic reasons such as changes in demand, taxes and interest rates. It can also change from non-economic reasons such as war or natural disasters. The company must be aware and analyze the different indicators of the changing economy. The recession, in which Larson Inc. is currently experiencing, is a normal part of the business cycle. It is said that fiscal and monetary policies can help decrease the peaks and recessions of the business cycle. The government would step in with fiscal policies. The government can provide more funding for private sectors and cut taxes to help stimulate...
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...with Australia’s dichotomous experience with the ratio. This fact is used to shed light on the importance of country-specific shocks for small open economies using a simple real business cycle model. While it has been previously found that country-specific shocks are more significant source of business cycle fluctuations than worldwide shocks for Australia before the 1990s, this article suggests that the country-specific shocks may have become an important driver of output growth only in the early 1990s for Australia. Keywords: worldwide shocks; country-specific shocks; international business cycle; half-life JEL Classification: E32; C32; F43 I. Introduction There has been a growing literature that seeks to extend standard closed economy Real Business Cycle (RBC) models to the open economy with the objective of explaining key features of international business cycles (Mendoza, 1991; Backus and Kehoe, 1992; Backus et al., 1992, 1995; Baxter and Crucini, 1993, 1995; Ravn, 1997). These authors have achieved some success in accounting for a number of anomalies that closed economy models fail to elucidate. Subsequent studies in this literature have emerged and brought interesting findings on international business cycle. One such discovery was on a variety of factors that affect the dynamics of business cycle fluctuations. For instance, multiple previous studies have attempted to address the issue of relative importance of worldwide shocks versus countryspecific shocks (Gregory et...
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...Expansion ECON545 Expansion Rick is interested in expanding his auto parts company to include many other potential customers. Rick would like to receive an informed opinion from someone who has had education on economical topics such as business cycles, unemployment, inflation, monetary policy, etc. before he commits to this endeavor. All of these topics and statistics will be taken into consideration and once informed Rick will make his decision accordingly. Business cycles A business cycle can be defined as “The fluctuations in economic activity that an economy experiences over a period of time” (Investopedia, n.d.). On average different business cycles have lasted around 69 months with expansion this period lasting 58 months and contraction 11 (Investopedia, n.d.). Of the various cycles the early expansion stage is the one most suitable for starting and or expanding a business. During this stage there is documented evidence that businesses in fields such as technology, entertainment, and services experience an increased profit margin. During the contraction phase, which includes severities such as recessions, only services such as healthcare flourish (Investopedia, n.d.). GDP is an important concept to consider when expanding a business. It measures consumption and production amounts within a specific country within a given timeframe (Investopedia, n.d.). Although there are critics of this method who argue that not all transactions are reported to the government therefore...
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...oversupply made it hard for farmers to make money due to the fact that they had so much that they were forced to sell it at substantial low priced just to remain competitive enough to make even the small profit they were making. The imbalances were however, self correcting in which if manufacturers made too much of something, it’s price would fall, profits would disappear, and the producers would cut back on output. In 1932 the American writer, Stuart Chase described cycles as “the spree and hangover of an undisciplined...
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