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Eco 13/5

Explore causes of business fluctuations & how factors like business investment, government activity, external forces, and psychology impact the economy. Learn about economic indicators - leading, coincident, and lagging - to make informed decisions.

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Eco 13/5

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  1. Eco 13/5 Causes and Indicators of Business Fluctuations

  2. Causes of Business Fluctuations • Fluctuations are related to 4 main forces: • Business investment • Government activity • External factors • Psychological factors

  3. Business Investment • Business decisions affect fluctuations. If a firm anticipates good times, it will increasecapital investment- buy new machines, build new factories, hire more workers, etc. If it anticipates hard times, it will scale back, stop hiring workers, etc. Innovations- when 1 company innovates, others must also to stay competitive.

  4. Government Activity • Gov’t affects fluctuations through taxing and spending.

  5. External Factors • Environmental disasters, war, etc affect fluctuations. Availability of raw materials, like oil, lower or raise production costs.

  6. Psychological Factors • Ex: We were entering a mild recession when 9/11 occurred. The attacks pushed us into a stronger recession. People stopped spending, businesses reduced investment plans.

  7. Economic Indicators • To aid decision makers, gov’t and private economists study economic indicators about the state of the economy. • Measure variables in the economy, like stock prices and changes in interest rates

  8. Leading Indicators • Statistics that point to what will happen in the economy are called leading indicators. • Lead to a change in overall business activity. • See figure 13.15 • “If you’re not the lead dog, the view’s always the same.”

  9. Coincident Indicators • Coincident indicators- economic indicators that change at the same time as changes in overall business activity. • When they begin a downswing, they indicate a contraction in the business cycle has begun, and vice versa.

  10. Lagging Indicators • Lagging indicators- lag behind changes in overall business activity. • Provide clues in the duration of the phases of the business cycle.

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