Chapter 10 Economic Performance

1. Chapter 10Economic Performance 10.2 What are business cycles?

2. What are business cycles? • Business cycles are changes in a market system’s economic activity • These changes are measured in real GDP • Durations of upswings or downswings can last for months or years

3. What are the 4 phases of the business cycle? • Phases of the business cycle • Expansion is a period of economic expansion & growth • Example: occurred during WWII because of high levels of spending on military • Peaks occur as the highest point of expansion—a time when the economy is the most prosperous • Consumer demands calls for producers to increase plant capacity & hire more workers

4. What are the 4 phases of the business cycle? • Phases of the business cycle • Contraction, or recession, is the point at with businesses slowdown • Recessions occur when there is a decline in real GDP for 2 or more consecutive quarters (6 months or more) • Depressions are the next step, and are a prolonged & severe recession • Example: Great Depression of 1930s • Troughs are the final phase of the business cycle, at which businesses reach their lowest levels • Troughs are usually followed by a period of economic recovery

5. What factors influence the business cycle? • Business investment • Businesses invest in capital goods to increase their production (Ex.: new machinery) • High levels of business investment promote expansion • Low levels of investment contribute to contractions • Business investment creates: • Demand for goods • Efficiency as new capital promotes better production methods • Stimulates technological change and higher output at lower production costs

6. What factors influence the business cycle? • Money & credit • Total output changes with the availability & affordability of credit • Individuals & businesses tend to borrow when interest rates are low • Public expectations • Does the consumer believe the economy is heading toward a recession or expansion?—this will influence spending • The same goes for business owners

7. What factors influence the business cycle? • External factors • Such as changes in the world’s economic or political climate • Example: Increases in world oil prices in 1973-74 & 1979-80 contributed to recessions in 1974-75 & 1980-92 • Wars generally strengthen business activity in the U.S. as the government spends money on national defense • Periods of expansion accompanied U.S. involvement in WWI, WWII, and both Korean & Vietnam Wars

8. What are the 3 leading indicators used to determine the current phase of the business cycle & predict where the economy is headed? • Leading indicators • Leading indicators are used by economists that anticipate the direction the economy is headed • Such as the number of building permits issued • The number of orders of new capital & consumer goods • The price of raw materials & stock prices

9. What are the 3 leading indicators used to determine the current phase of the business cycle & predict where the economy is headed? • Coincidental indicators • Coincidental indicators are factors that change as the economy moves from one phase of the business cycle to another • Tells economists is there is an upturn or downturn in economy • Includes: • Personal income • Sales volume • Industrial production levels

10. What are the 3 leading indicators used to determine the current phase of the business cycle & predict where the economy is headed? • Lagging indicators • Lagging indicators are indicators that change monthly after an upturn or a downturn in the economy has begun • Help economists predict the duration of an economic upturn or downturn • Include: • Use of consumer installment credit • Number & size of business incomes