The business cycle

• EXPANSION (upturn)

  -            Rise in employment, investments, profits…

  -            GDP rising

  -            Result: Economy working at its full capacity

  -            BOOM = a long period of expansion
• CONTRACTION (downturn)

  -            Fall in demand, sales, output, employment, profits, commodity and share prices…

  -            GDP falling

  -            Result: Economy working below its potential

  -            RECESSION = more than six months of negative GDP growth

  -            DEPRESSION/SLUMP = more than a year = prolongued period of economic recession
• What causes expansion?

  1. PEOPLE’S SPENDING = CONSUMPTION DECISIONS

  = decisions on whether to spend, save, borrow... It is based on expectations of people (things are going to be OK, let’s spend! Or times are rough, let’s save as it is going to be worse)

  Major drivers of spending:

  -            Jobs - Low prices

  -            Optimistic expectations - Availability of credit

  -            Value of assets, real estate

  = optimism, people spend + borrow money *(run up debts)
• What causes downturns?

  -            Too much money chasing too few goods (demand higher than supply) – economy is overheating - inflation (rise in prices)

  -            investors and businesses compete to outperform the market, take risky steps!!! - A number of business errors that happen simultaneously

  -            Inflation is also caused by increased production costs, energy costs, national debt…

  -            Plus: Economy cannot grow endlessly
• -            Consequences of downturn:

  o   Spending goes down – production goes down – lay offs

  o   Debts have to be paid off + if interest rates rise – people cannot repay loans

  o   pessimism (people worried – could lose jobs)

  o   People start saving and spending less

  §  fall in demand

  §  fall in production and employment

  §  fall in investment

  §  GDP goes down

  -            Investors sell stocks, buy bonds, gold
• TROUGH (t(č)rof) – lowest point of business cycle

  -            Consumers must regain confidence. How to do it?

  -            The state has to intervene – through monetary and fiscal policy

  -            If supply exceeds demand, prices fall = people can buy more = economy starts recovering
• EXTERNAL (EXOGENOUS) THEORY

  -            Causes are outside economic activity

  o   wars, unrest, elections, political shocks

  o   natural disasters (eg. Earthquakes, corona )

  o   demographic changes (eg. Ageing in the EU )

  o   scientific and technological advances (IT industry, drugs… )

  -            Joseph Schumpeter claimed b.cycle is caused by major techonological inventions.

  -            However, they lead to periods of ‘creative destruction’ (innovations destroy established industries that depend on „old” technologies)
• INTERNAL (ENDOGENOUS) THEORY

  -            Causes are in the economic activity
• Supply


  The willingness and ability of businesses to offer goods or services for sale
• Demand


  The willingness and ability of consumers to purchase goods and services
• Gross domestic product (GDP)


  The total market value of all the goods and services produced in a country during a given period
• Balance of payment


  The difference between the funds a country receives and those it pays for all international transactions
• Consumption


  Purchasing and using goods and services
• Expansion


  An increase in economic activity
• Contraction


  A decrease in economic activity
• Recession


  A downturn that lasts more than six months
• Depression


  A downturn that lasts for a year or two, and is more serious
• Endogenous theory


  Internal theory of the business cycle
• Exogenous theory


  External theory of the business cycle
• Creative destruction


  A phase in the economy in which radical innovations destroy established companies or industries
• Money supply


  The total amount of money available in an economy at a particular time
• Fiscal policy


  Government or central bank actions concerning taxation and public expenditure
• Monetary policy


  Government or central bank actions concerning the rate of growth of the money in circulation
• The business cycle or trade cycle is a feature of market economieswhich means that the economy alternatively grows and contracts.
• During the upturn orexpansion, the economy works at full capacity. Production, employment, businessinvestments, profits, prices and interest rates all tend to rise. A long period of expansion is called a boom.
• During the downturn, the economy contracts. The demand for goods and services decline. The economy works at below its potential. Investment, output, employment, profits, commodity, share prices and interest rates start to fall.
• The most probable cause of the business cycle is consumption or people's spending. It is based on expectations. Sometimes people decide to spend, and sometimes not to spend money.
• The important thing is that in good times people feel confident and spend. Moreover, they tend to borrow money for more spending. Businesses also make loans in order to invest more and expand. This means that they all run up debt.
• After some time, they cannot borrow more, and debts have to be repaid. So, people decrease their spending. That all leads to a fall in demand. Consequently, production goes down, and business people are less willing to make investments. Employment also declines. 
• Opposites

  1.      Save – Spend

  2.      Expand – Contract

  3.      Demand – Supply

  4.      Depression – Boom

  5.      Endogenous – Exogenous

  6.      Peak – Trough
• Synonyms

  1.      Slump – decline

  2.      Recovery – upturn

  3.      Boost – stimulate

  4.      Decrease – reduce

  5.      Excess – surplus

  6.      Grow – expand

  7.      Spending – expenditure

  8.      Production – output