Economic (Business) Cycle

• The macro objective for growth is for growth to be strong, sustained, and sustainable.
• Real GDP is represented on the y-axis and time on the x-axis.
• Actual growth is represented by a squiggly line, trend rate of growth by a smooth upward sloping line, and potential growth by a straight line.
• The economic cycle, also known as the business cycle, consists of four different phases: boom, slowdown, recession, and recovery.
• An actual growth line can rise and fall over time, but it is still rising, indicating an increase in real GDP over a given period of time.
• Output gaps occur when actual growth is greater than potential growth, as represented by a positive output gap, or when actual growth is less than potential growth, as represented by a negative output gap.
• In a boom, growth is rampant with actual growth likely to be beyond potential growth, a positive output gap, and firms are producing a lot of goods and services.
• Consumer confidence and business confidence are high in a boom, driving consumer spending and business investment.
• In a recession, the economy is doing poorly, with actual growth lower than potential growth, a negative output gap, higher unemployment, and firms getting rid of workers to maintain profit margins.
• Consumer confidence and business confidence are low in a recession, driving down consumer spending and business investment.
• In a trough, the economy is at its worst position, with actual growth at its lowest point, unemployment higher, and firms having to cut back on production.
• Consumer confidence and business confidence start to improve from a trough, indicating an economic recovery.
• Businesses are more confident and expand their factories, leading to an increase in machinery purchases and renovations.
• Shocks can occur on the demand side or the supply side of the economy.
• Consumer confidence is a key indicator of the economy's health, and its recovery is a sign of economic growth.
• Loose macro policy measures such as lower interest rates, higher government spending, and lower taxation are used to stimulate the economy and prevent it from falling back into recession.
• Demand side shocks are factors that end up reducing aggregate demand, such as a sudden increase in interest rates, a sudden cut in government spending, a sudden strengthening in the exchange rate, a sudden housing market crash, a sudden banking sector crisis, or a sudden financial market crash.
• Supply side shocks are factors that shift supply left, such as natural disasters, wars, or factors that affect LRS like a sudden increase in the price of raw materials, a sudden increase in wages, a sudden increase in business taxes, or a sudden weakening of the exchange rate.
• Businesses feel more confident and expand their factories, leading to an increase in construction activity.
• Consumer spending on expensive items like houses and cars increases as confidence in the economy recovers.
• Firms maintain profit margins and high revenues by destocking, discounting prices, and reducing production.
• Business confidence leads to less consumer spending, which in turn, reduces investment and construction activity.
• Shocks can occur in the economy, such as a sudden increase in interest rates, a sudden cut in government spending, a sudden strengthening in the exchange rate, a sudden housing market crash, a sudden banking sector crisis, or a sudden financial market crash, which can plummet the economy into recession.