1. Peak
ry
ve
co
Re
Trough
on
ion
ssi
ss
ce
ce
Re
Re
Peak

2. Business Cycles
√ The term business cycle refers
to the recurrent ups and downs in the
level of economic activity, which
extend over several years.
√ Individual business cycles may
vary greatly in duration and intensity.
√ All display a set of phases.

3. THE BUSINESS CYCLE
Phases of the Business Cycle
PEAK
RECESSION TROUGH RECOVERY
TH
OW D
Level of business activity
GR EN
TR
Time

4. Level of business activity
PEAK
H
WT
G RO ND
E
TR
Time
√ Peak or prosperity phase:
 Real output in the economy is at a
high level
 Unemployment is low
 Domestic output may be at its
capacity
 Inflation may be high.

5. Level of business activity
RECESSION H
WT
G RO ND
E
TR
Time
√ Contraction or recession phase:
 Real output is decreasing
 Unemployment rate is rising.
As contraction continues, inflation pressure fades.
 If the recession is prolonged, price may decline (deflation)
The government determinant for a recession is two
consecutive quarters of declining output.

6. TROUGH
Level of business activity
H
WT
G RO ND
E
TR
Time
√ Trough or depression phase:
 Lowest point of real GDP
 Output and unemployment “bottom out”
 This phase may be short-lived or prolonged
 There is no precise decline in output at which a
serious recession becomes a depression.

7. Level of business activity
RECOVERY
H
WT
G RO ND
E
TR
Time
√ Expansionary or recovery:
 Real output in the economy is increasing
 Unemployment rate is declining
 The upswing part of the cycle.

8. Business Cycle-one cycle through 4 phases
Real GDP
Peak
Peak
per year
ry
ve
Re
co
Re
ce
Re
ce
ss
ss
io
io
nn
Trough
One cycle Time

9. Recessions since 1950 show that duration and
depth are varied:
Period Duration in months Depth
(decline in real GDP)
1953-54 10 — 3.0%
1957-58 8 — 3.5%
1960-61 10 — 1.0%
1969-70 11 — 1.1%
1973-75 16 — 4.3%
1980 6 — 3.4%
1981-82 16 — 2.6%
1990-91 8 — 2.6%
2001 8 app. —3.3%

10. How Indicators Monitor the
Four Phases of the Business Cycle
• The Leading Indicator System
… provides a basis for monitoring the
tendency to move from one phase to the next.
…assesses the strengths and weaknesses in the
economy
… gives clues to a quickening or slowing of
future rates of economic growth
… indicates the cyclical turning points in
moving from the upward expansion to the downward
recession, and from the recession to the upward
recovery.

11. Causes of Fluctuations
Innovation
Political events
Random events
Wars
Level of consumer spending
Seasonal fluctuations
Cyclical Impacts — durable and non
durable

12. An Actual Business Cycle
An Actual Business Cycle
1981 --1990 ($ billion, 1992 dollars)
1981 1990 ($ billion, 1992 dollars)
Real GDP
6000 Peak
5200
Peak
4600
Trough
‘80 82 ‘85 ‘90
One Cycle

13. The Great Depression

14. The Great Depression [continued]

15. Great Depression Stats

16. Global Depression, 1929-1932
Ave. Unemployment Rate, 1925-1928
Ave. Unemployment Rate, 1929-1933
Percent Decrease in Prices, 1929-1932

17. Six Million “Rosie the Riveters”
World War II Production of these items brought us out
of the Great Depression.
300,000 warplanes
124,000 ships
289,000 combat vehicles and tanks
36 billion yards of cotton goods
41 billion rounds of ammunition
2.4 million military trucks
111,527 tank guns and howitzers
•$288 billion was spent on the war,
•$100 billion in the first six months.
Unemployment hit an all-time low of 1.2%
and personal savings were 25.5%.