Question

1) In 1 page or less, describe the Business Cycle in terms of GDP. a) Explain what is happening in each phase of the business cycle including expansion, recession, peak, and trough. b) Give examples of the implications of expansions and recessions to people and businesses. c) In the long-run, does GDP in most economies show an upward or downward trend?

Answer 1

1)

                                    A Business cycle refers to an economic or a trade cycle which represents an upward or downward movement of GDP in a long-term economy. A normal Business cycle consists of four major phases Expansion, peak, recession/contraction and trough. It is a representation of the fluctuation of economic activity and the time period of a single business cycle is a period of time containing a single boom and a contraction in sequence. Here, the aggregate economic activity not only includes the real GDP measures, but also contains measures of industrial production, employment, income and also sales.

a)

                                    The four major stages of a business cycle are Expansion, peak, recession and trough. The major happenings of each of these stages are given as follows

· Expansion: An expansionary stage represents a growing economy and falls between a trough and a peak. Here, the GDP growth rate is expected to be steady at around 2%-3% and the unemployment rate is expected to be around natural rates of 3%-4%. The inflation rates are also better [around 2%-3%] and if such an economy persists for longer years, it is called as the Goldilocks economy.

· Peak: It represents a transitionary point between expansion and contraction. This is a stage when all the economic indicators would reach a maximum value. The GDP levels would be higher and the inflation levels would touch double digits. The economy thus becomes out of control of the market forces and hence result in the creation of asset bubbles.

· Recession: It is a contractionary phase that starts at the peak and ends in the trough. It represents a weakening economy wherein the GDP levels begins to fall [contraction] and reaches a negative value [recession]. The unemployment rates would be higher and the stock market would be dominated by bears.

· Trough: This is a point that represents the bottom of a business cycle or economic activity. In this stage, all the economic indicators are expected to be at their worse levels. Thus, it represents a point of transition from the recessionary stage to a contractionary stage.

b)

                                    As discusses earlier, the following are the implications of expansion and recession to the people and business

Implications of Expansion

· It is a stage of boosting economic activity which means that the business activities in the economy would be expanding

· In this stage, a lot of money would be available in the market so as to sustain the economy at its optimal and efficient levels and hence the business investments would be higher due to the availability of a stable market.

· As far as people in an economy are concerned, the unemployment levels would be lower at around 3%-4% and the consumption patterns would be smother due to the availability of a stable market

· Due to stable inflation levels of around 2%-3%, the business activities would be sustainable.

Implications of Recession

· A recession represents a negative contractionary stage wherein the GDP levels would be following negative values

· This implies that the spending pattern of an economy would be reduced and the business activities would be at its lowest. The production would be lower and the stability of the economy would be worse

· As far as people are concerned, the unemployment rate would be higher and the money availability would be lower which would lead to lesser consumption in the society

c)

                                    The above discussions states that a business cycle represents short term variations in an economy and is a continuous process. The expansionary stages would see an increase in the GDP and the contractionary phase would see a reduction in the GDP. These would happen in a short-term economy. But as far as long-term economies are concerned, they are characterized and featured by various responsive actions also taken by the fiscal and monetary authorities to stabilize a market structure. This implies that as a result of various implications of business cycle patterns in an economy, the measures taken would end up in market stability as far as majority of the nations are concerned. With international trade and foreign exchange effects, it is hence believed that in the long-run economy, the GDP rates would be higher for majority of the nations except a few nations which falls in to liquidity traps and cannot recover even in the longer run. But, such nations never occur as far as economic theories are concerned.