The Business CycleThe Business Cycle

The Business CycleThe Business Cycle

What is it?What is it?– Systematic ups and downs of GDPSystematic ups and downs of GDP

Consists of…Consists of…

Peak – the point where GDP stops going Peak – the point where GDP stops going upup

Trough – where GDP stops going downTrough – where GDP stops going down

Expansion – growing GDPExpansion – growing GDP

Contraction – declining GDPContraction – declining GDP

Business cycleBusiness cycle

Downward slope for two Downward slope for two consecutive quarters=consecutive quarters=

Upward Slope = Upward Slope =

Recession and DepressionRecession and Depression

Recession - Period in which real GDP Recession - Period in which real GDP declines for two quarters in a row.declines for two quarters in a row.

Depression – state of the economy with Depression – state of the economy with large numbers of people out of work, acute large numbers of people out of work, acute shortages, and excess capacity in shortages, and excess capacity in manufacturing plants.manufacturing plants.

Recession and DepressionRecession and Depression

Leading FactorsLeading Factors

Spending = Capital ExpendituresSpending = Capital Expenditures

Changes in inventoryChanges in inventory

Innovation, or imitationInnovation, or imitation

Monetary Factors – credit and loansMonetary Factors – credit and loans

External “shocks” – increases in prices, wars, External “shocks” – increases in prices, wars, etc.etc.

Why do you care?Why do you care?

What does it really mean to be in a recession?What does it really mean to be in a recession?

People losing jobs, unemployment on the rise, People losing jobs, unemployment on the rise, investments are being lost, etc.investments are being lost, etc.

What does it really mean to be in a depression?What does it really mean to be in a depression?

Large number of citizens out of work, factories Large number of citizens out of work, factories closing, corporations going out of business.closing, corporations going out of business.A depression is, in essence, nothing more than A depression is, in essence, nothing more than a prolonged recession.a prolonged recession.