The Business Cycle

Chapter 10 Economic Fluctuations,

Unemployment and Inflation

Business Cycle

Defined as:– The pattern of rising real GDP followed

by falling real GDP.

Business Cycle

• Pattern of the Business Cycle– The pattern is that of a period of growth,

called expansion, which hits a peak.– The growth is followed by a fall in the

economy, called a contraction.– The bottom of the fall is called the

trough.

Business Cycle

• Pattern of the Business Cycle– After a period of time in the trough, the

economy resumes its growth/expansion.– Later, it hits another peak, at a higher

size of GDP.

Changing Business Cycle Vocabulary

• Panic• Crash• Depression• Recession• Growth-Adjustment Phase• Jobless Recovery

Indicators

• Economists use changes in a variety of activities to measure the business cycle, and to try to predict where the economy is headed.

• They include:– Leading indicators– Lagging indicators

LEADING INDICATORS

• Variables that change before real output changes.

• They include:– Unemployment claims– Manufacturers’ new orders

LAGGING INDICATORS

• Variables that change after real output changes.

• They include:– Inventories to sales ratio– Outstanding commercial loans