BUSINESS

CYCLE
 ◦ a cycle of fluctuation in the GDP around its
long-term natural growth rate
◦ explains the expansion and contraction in
economic activity

Business ◦ completed when it goes through single

expansion and a single contraction in
Cycle sequence
◦ measured in terms of growth of real GDP,
which is inflation-adjusted

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 • monetary value of all the finished goods and
services produced within a country's borders in a
specific time period

Gross Gross Domestic Product

Domestic = Consumer Spending + Government Spending
Product + Investment Spending + Net Exports

• subject to inflationary pressure

• Nominal GDP versus Real GDP

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 Year Production Price Nominal GDP Real GDP
2000 1000 $2 $2000 $2000
2001 1200 $3 $3600 $2400
2002 1800 $4 $7200 $3600
2003 1600 $5 $8000 $3200

Looking at an economy's unadjusted or nominal GDP, it is difficult to tell whether the GDP
went up as a result of production expanding in the economy or because prices escalated.

Economists have come up with an adjustment for inflation to arrive at an economy's real GDP.
By measuring the real GDP, it is possible to compare a country's GDP from one year to another
and see if there is any real growth.

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STAGES OF BUSINESS CYCLE

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1. Expansion
• an increase in positive economic indicators such as employment,
income, output, wages, profits, demand, and supply of goods and
services

2. Peak
• maximum limit of growth is attained
• economic indicators are at their highest
• prices are at their peak
• the reversal in the trend of economic growth

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3. Recession
• demand starts to decline rapidly and steadily
• excess supply in the market
• all positive economic indicators consequently starts to fall

4. Depression
• growth in the economy continues to decline
• rise in unemployment

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5. Trough
• further decline until the prices of factors, demand, and supply
of goods and services reach their lowest
• extensive depletion of national income and expenditure

6. Recovery
• Demand starts to pick up due to the lowest prices and consequently,
supply starts reacting, too.
• economy develops positive attitude towards investment and
employment, hence production starts increasing
• lending shows positive signals
• continues until the economy returns to steady growth levels

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 ◦ a piece of economic data that is used to
describe projected, current, or past
economic activity.

ECONOMIC
Conference Board is a private research
INDICATORS
group founded in1916 that published a
composite index - a weighted average of
leading, coincident, and lagging economic
indicators.

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1. Leading Indicators
• indicators that change before the economy changes
• describe the projected economic activity

2. Coincident Indicators
• indicators that change at approximately the same time as the whole
economy
• provide information about current state of economy

3. Lagging Indicators
• indicators that change after the economy has begun to change
• describe the past economic activity

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 “a significant decline in activity spread across the
economy that lasts more than a few months” - National
Bureau of Economic Research (NBER)
visible in real GDP, real income, employment, industrial
production, and wholesale-retail sales
“period of diminishing economic activity”
begins just after the economy reaches a peak of output
and employment and ends as the economy reaches its
ECONOMIC trough

RECESSION Economic Expansion is the period following recession.

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 Inflation
the general rise in prices of goods and services over
a period of time

What Reduced Real Wages

Causes wages that have been adjusted for inflation

Economic Reduced consumer confidence

statistical measure of consumers' feelings about
Recession? current and future economic conditions

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Thank you for listening!

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