Objectives

2. Objectives • To examine the four phases of the business cycle. • To relate the business cycle to current trends in the market, analyzing specific companies. • To demonstrate clear knowledge of the growth phase and comparing companies which are in this category, those on the rise and those declining.

3. The Juglar Cycle • Was invented by the French physician and statistician Clemente Juglar • First identified cyclical patterns within the economy • Recognizes the business cycle occurring every eight to 11 years • Is often referred to as “The Business Cycle”

4. The Business Cycle • Explains the fluctuations in economic activities • Represents the patterns of expansion and contraction in the economy over long periods of time • Divides into four parts: • growth • peak • recession • trough

5. Peak Recession Expansion Trough The Business Cycle Real GDP Time

6. Growth • May also be called expansion or recovery • Occurs when persistent increases in the key measurements of aggregate economic activities are present • Accounts for the increase in productivity among companies toward full production • Causes a rise in price before full employment and production is attained Aggregate: the sum or whole amount of something Productivity: measurement of physical output for each unit of input used, usually referring to labor hours

7. Aggregate Economic Activities • Are measured in terms of: • employment • income • sales • productivity

8. Growth • Can be viewed as a “virtuous cycle”

9. Causes of Growth • Include the following: • business is newly formed • more branches of the business are opened • need for the product rises or is created • introduction of new or improved product

10. The Peak • Accounts for the time when business activity has reached a maximum, including: • full employment • level of output at or near capacity • Often causes higher prices • Acts as a transition point from growth to recession

11. Causes for the Peak • Include the following: • boom in the economy • sudden need or want of the product • availability of product rises • the product is unique for the time being

12. Recession • May also be referred to as contraction • Follows the peak • Is commonly defined as two consecutive quarterly declines in GDP • Accounts for a decline in: • total output • income • employment • trade

13. Gross Domestic Product • Accounts for the total market value of all goods and services produced within the borders of a country during a specific time period

14. Recession • Occurs in all companies • Rarely causes price level to fall • unless severe and prolonged, as in a depression • Differs from depression • depression occurs when GDP drops by more than 10% while a recession experiences a less severe drop

15. Causes of Recession • Include the following: • product falls behind in usefulness, technology or want • value of the dollar declines • customer debt

16. The Trough • Marks the lowest levels during a recession • Accounts for the least amount of output and employment • May be short or long lived • Ends the period of recession and begins growth

17. Causes of the Trough • Include the following: • the product is severely outdated • need or want for the product is at an all time low • the product has not changed over time • many customers already possess the product

18. Business Cycle Indicators • Are used to foresee changes in the economy of a country • Help predict peaks and troughs within business cycles • Account for reports comprised of statistical data which are studied by economists • Should not be trusted to always accurately predict changes in the economy

19. Business Cycle Indicators • Include the following factors: • labor force • wages, labor costs and productivity • exports and imports • national defense • personal incomes and consumer attitudes • output, production and capacity utilization

20. America Online® (AOL®) Sample • Is an online service provider • Gained popularity in the mid to late 1990’s • Portrays a company which has experienced the business cycle

21. AOL® Growth • Began in the mid 1990’s • Occurred for the following reasons: • marketed as being usable for people unfamiliar with computers • fee was changed from an hourly rate to monthly payment of $19.99 in 1996

22. The AOL Peak • Occurred around 2000 when the company was valued at slightly over $200 billion • Resulted from the following: • flat monthly fee rather than hourly rate • providing the user friendliest Internet service provider • advertisements allowing for customers to become familiar with AOL® and its workings, such as “You’ve Got Mail®”

23. The AOL® Recession • Started shortly after its peak • Occurred due to the following: • competition from cheaper Internet service providers • the introduction of broadband high speed Internet • AOL® running slowly due to high volumes of users

24. The AOL® Trough • Has not yet occurred • Is trying to be avoided as AOL® has completed the following: • merged with Time Warner®, a large and profitable multimedia company • revenue still falls after this historically expensive merge • offered high speed Internet • recruited new employees to offer fresh ideas concerning the renewal of the company

25. Review • The business cycle explains the fluctuations in economic activities • The four parts of the business cycle are growth, peak, recession and trough • Business cycle indicators are used to foresee changes in the economy, and include factors such as labor force, wages, exports and imports, national defense and output