BTC or the Business Trade Cycle is the Real GDP (Economic Activity) over time.
- Fluctuations in the growth of real output, consisting of alternating periods of expansions and contractions, are called business cycles or economic fluctuations.
- A business cycle plots real GDP on the vertical axis against time on the horizontal axis.
- GDP 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 have been eliminated.
Expansion
- An expansion occurs when there is positive growth in real GDP shown by those parts of the curve that slope upwards.
- During periods of real GDP growth, employment of resources increases, and the general growth level of the economy (which is an average over all prices) usually begins to rise more rapidly (this is known as inflation).
- Business Inventories drop, Consumer/Business Confidence increase, real wage increase, business investment increase
Peak
- 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 quite, rapidly; the economy is likely to be experiencing inflation.
- Very high consumer confidence, high real wages, aggregate expenditure up
Contraction
- Following the peak, the economy is beginning to experience falling GDP (negative growth), shown by the downward-sloping parts of the curve.
- If the contraction lasts six months (two quarters) or more, it is termed a recession, characterized 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.
Trough
- 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.
- Inventories high, business investment lowest point, very low consumer confidence
Business Trade Cycle
The term “business cycle” is very irregular. While each cycle lasts several years, it is not possible to generalise, as there is wide variation in duration. Economic growth over long periods of time, representing by a upward-sloping potential output line, is a highly desirable objective. Large cyclical fluctuations are not desirable.
Rapid rises in inflation is not healthy for the economy.
Reducing the intensity of expansions and contractions, would lessen the problems of rising price levels in expansions and unemployment in contractions.
Indicators
An indicators is anything that can be used to predict future financial or economic trends.
Three types:
- Leading Indicators
- Lagging Indicators
- Coincident Indicators
Leading Indicators
Leading Indicators: These types of indicators signal future events. (Make predictions so not always correct)
New housing starts, money supply, and M2 are considered good leading indicators.
- Share Prices
- Building Approvals
- Levels of Stock held by firms
- Manufacturer’s new orders
- Business and consumer confidence
- Consumer Expectations
Lagging Indicators
Lagging Indicators - A lagging indicator is one that follows a event.
- Importance - Confirms that a pattern has occurred
- Consumer Price Index and Unemployment Rates are popular lagging indicators
Coincident Indicators
Coincident Indicators - These indicators occur at approximately the same time as the conditions they signify.
- Personal Income (High personal income coincide with strong economy) and GDP are types of these.
- Production of Building Sales
- Job Advertisements