Our Expert Tutors Can Help With Difficult Assignments. 
Economics   
Statistics    
Accounting
Graduate Education
Mathematics

Chapter 9 The Business Cycle

To Print from an Internet browser, set type size to Smaller by choosing
View, Text Size and Smaller, and choose File and Print. You may also need to set the margins to 0.25 inches. 
 

Our Economics Learning Center has information for students, teachers, an professionals.

Please Visit Our Sponsors

Free Business Book Summaries
Accounting for Non-Accountants is a self passed Internet course.
 Free Sample of Statistics Using the Quick Notes Learning System.
 Free 5 Day Trial of Excel Tutorials

I. Business cycles describe the fluctuations in business activity over time.

Graph from Wikipedia

The Dow Jones Average 1900- 2004 also followed a cycle.

Chart from minyanville.com

From The Big Picture blog of January 9, 2008

April of 2008

   

    A. Recession: commonly accepted definition is two consecutive quarters of negative growth in Real GDP.
    B. Why business activity fluctuates
         1. Inventory Recession: Excessive optimism causes inventories to over expand and eventually they must be worked 
            down causing a recession. Computers have made easier to track inventory and made this type of  recessions less likely. 
         2. Rolling Recessions: Economic downturn is limited to areas or sectors of the economy. 
             a. Economic activity eventually increases but by then other areas and sectors are in recession. 
             b. International competition has increased the occurrence of this type of recession as sectors 
                 such as steel, autos, and recently computers have been affected.
        3. Innovation Cycle: railroads, computers, bio-technology
        4. Political Events: wars, international trade
        5. Misuse of Monetary and Fiscal Policy: government creates and/or borrows an incorrect amount of money
        6. Non-cyclical Fluctuations
           a. Seasonal variation: Christmas buying rush, spring construction 
           b. Long-Term Secular Trends: the expansion or contraction in the level of economic activity over a long period 
               of years (the dark ages, the industrial revolution) For more visit Long Waves Theories of Development
               from the Kunter Krumme, U. of Washington.

    D. Durable Goods have a long useful life (houses, equipment, etc.) Sale of durable goods contract substantially during
         a recession as their purchase may be easily postponed.
    E. Leading, coincidental, and lagging indicators are measures such as the unemployment rate which respectively 
        change before, with or after general economic activity. Economists use these indicators to predict future economic activity.
    F. Visit Business Cycle data since 1854 National Bureau of Economic Research.
    G. Visit  Business Cycle Business Cycles Empirical Issues from The History of Economic Thought Website for more information on business
         cycles

   H. Great Depression by Robert J. Samuelson, the Concise Encyclopedia of Economics
       
1. Amity Shales on the Great Depression, On EconTalk, Russ Roberts interviews Amity Shlaes, Bloomberg columnist and visiting senior fellow
            at the Council on Foreign Relations. She talks about her new book, The Forgotten Man: A New History of the Great Depression.
           The podcast discusses Herbert Hoover, Franklin Delano Roosevelt, the economics of the New Deal and the class warfare of the 1930s
      
2. The Great Depression, On EconLog and in his column at TCS Daily, Arnold Kling also focuses on some of Shlaes's observations
           adding thoughtful insights.
   
I. Current Business-Cycle Conditions from American Institute for Economic Research (AIER)
 
   J. Slide Show: A Business Cycle Ends, and Many U.S. Workers Lose Ground Business Week

        reviews the latest business expansion ending in early 2008.
    K.
On the Economy CNBC Video, April 10., 2008vAn overview of the economy with Joseph Stiglitz, a Nobel Prize-winning economist,
        and Mohamed El-Erian, co-CEO of PIMCO
    L. These books have opinions on the long-term secular trend of the United States.


See Understanding Contrary Indicators for more information.
Interesting Links Leading Indicaters
US LADING ECONOMIC INDICATORS  AND RELATED COMPOSITE INDEXES FOR APRIL 2008 Conference Board U.S. Business Cycle Indicators
Leading Indicaters from conference-board.org/pdf
Index of Leading Indicators – Premature to Rule out Recession Asha G. Bangalore Northern Trust, May 19, 2008
http://tinyurl.com/4gma4w
LEI and KRWI - It's Different This Time? Paul KasrielNorthern Trust, April 21, 2007http://www.safehaven.com/article-7404.htm
RECESSION IMMINENT? BOTH THE LEI AND KRWI ARE FLASHING WARNINGPaul L. KasrielNorthern Trust, March 22, 2007   
http://www.financialsense.com/economy/northern/kasriel/2007/0322.html
Leading Indicators Show Economy Remains SluggishTHE ASSOCIATED PRESS,  May 19, 2008 
http://www.nytimes.com/aponline/business/AP-Economy.html
Leading Economic Indicatorshttp://globaleconomicanalysis.blogspot.com/2007/01/leading-economic-indicators.html

 
 

cover

cover

     Business Cycle Indicators Handbook

is less speculative and free!

Want to know why President Bush is acting as he is,
read Generations, it predicts everything, and the author of this site's

Book Summary of American Dynasty
Aristocracy, Fortune, and the Politics of Deceit in the House of Bush 

II. Three types of unemployment
     A. Frictional is caused by time lags in the operation of labor markets.
          1. Workers are between employment because they have been fired, are changing careers, are seasonal workers, 
              have been temporarily laid off, etc.
          2. Short-term, inevitable, temporary, and is eliminated with time.
     B. Structural is caused by changes in consumer demand and technology.
         1. Result is an oversupply of workers with a particular skill. 
         2. This unemployment is often concentrated in a particular area, associated with a particular industry, and is often permanent. 
         3. Increased economic activity will not decrease this type of unemployment as training and/or relocation are required.
         4. Happened in the 1970's and early 1980's as consumers decided to buy small foreign built cars and other products
             produced in the Rust Belt. Now it is happening on each coast because of defense cutbacks, throughout industry as
             restructuring is needed because of foreign competition.

    C. Cyclical
         1. Caused by a lack of total demand at the end of an economic expansion 
         2. Temporary
         3. Recession of the early 1990's was due to a drop in demand caused by a debt buildup in the 1980's by individuals,
             businesses, and the federal government. Apprehension caused by high structural unemployment of both blue and 
             white collar workers slowed the recovery.
         4. Recession of 2001 was caused by debt build up of individuals resulting from the long period of prosperity and the stock 
             market bubble, excess capital investment caused by Y2K and internet optimism, and September 11.  
         5. Recent unemployment data  provided by the federal Reserve Bank of Saint Louis. 
         6. U.S. Unemployment, 1960-Present from Bradford DeLong's( USC Berkley) is a dynamic presentation. 

III. Other unemployment topics 
       A. Natural unemployment (frictional + structural unemployment) is usually 4% to 6% of the labor force 
       B. Full employment is when cyclical unemployment equals zero 
       C. Okun's Law: a 1% increase in cyclical unemployment will cause a 2.5% annual drop in GNP.
           1. GNP change = 2.5 (unemployment rate change)
           2. If unemployment goes up 2% as it did in the 1990-91 recession then the drop in GNP would be 2.5 X 2% or 5%.
           3. Cost to a 6 trillion dollar economy of 250 million people  (5% X $6,000,000,000,000) / 250,000,000 = $1200/person/year.
      D. Labor Force Participation Rate from The Big Picture blog.
      E. Noneconomic costs of unemployment include loss of skills, self-esteem, and social-political unrest.
      F. Discouraged workers leaving the workforce lowers unemployment.

 

 



Data reported in The Big Picture Economics Blog.
IV. Inflation
      A. An increase in prices is measured by a price index such as the Consumer Price Index (CPI) and Producer Price  Index (PPI).
      B. The PPI measures the change in wholesale prices.
      C. The PPI is a leading indicator for CPI as wholesalers can usually pass price changes on to retailers who pass them to
           consumer.
           1. Recent increases in foreign competition made passing price increases on more difficult.
           2. The internet had the same kind of affect in the late 1990's. 
      D. The inflation rate for a year when a basket of consumer goods increase from $400 to $420 would be calculated as follows.

 

 


      E. Recent inflation data provided by the Department of Labor.  
      F. U.S. Inflation, 1960-Present from Bradford DeLong, of USC Berkley, is a dynamic presentation.        

V. Causes of inflation
     A. Demand-pull inflation
         1. Increases in C + I + G + XN will cause GDP to increase.
         2. As the economy nears full employment, the prosperity caused by high employment increases demand and put
             upward pressure on prices.
         3. When this happens, the economy is said to be overheated.
     B. Cost-push inflation
         1. As the economy approaches full employment factor resources become scarce allowing their owners to increase prices.
         2. Supply-side shocks can cause high resource prices even if demand for resources is low, i.e., OPEC's two oil  
             embargoes of the 1970's

VI. Economic effect of inflation
      A. Both income and resource allocations are affected by inflation as the market tries to adjust to the loss in value
           caused by inflation.
          1. High gas prices in the 1970's caused a switch to small cars and many people bought wood stoves.
          2. Low gas prices in the 1990's made RV's less expensive to run.
      B. Debtors (homeowners, businesses, government) are helped by high inflation because they pay back with dollars 
          worth less than those borrowed.
      C. Creditors are hurt by inflation as they are paid back in less valuable dollars. Those on a fixed income are also 
           hurt by the cheaper dollars. 
      D. Cost-of-Living Increases (COLA's) were instituted in the 1970's to negate the severe effects of that period's high inflation.
           For more information visit
Cost of living from Wikipedia.
      E. Deflating GDP
          1. Inflation can be taken out of growth in GDP by expressing later year production at earlier year prices.
 
          2. In the following chart, letters Q, P and T are quantity, price per unit and total respectively.

 

1980

1990

1990 Production 
at 1980 Prices

From From Inflationdata.com

Production

Q

P

T

Q

P

T

1990 Q

1980 P

T

Shirts

1

10

10

2

20

40

2

10

20

Movies

2

3

6

3

5

15

3

3

9

GDP

 

 

16

 

 

55

 

 

29

Note : Output more than tripled in "nominal" terms but in real terms output increased by 81.25% (29-16)/16

VII. Shadow Government Statistics  and Grossly Distorted Procedures provides an interesting view of government calculated economic statistics.

 

 

Last Chapter  Next Chapter 
Chapter 9 Class Discussion Questions Table of Contents
Chapter 9 Homework Questions Economics Internet Library