Business Trade Cycle (BTC)

Last updated Sep 12, 2023 Edit Source

• Fluctuations in the growth of real output, consisting of alternating periods of expansion and contraction are called business cycles or economic Fluctuations
• A business cycle plots real GDP on the vertical axis, against time on the horizontal axis

• An expansion occurs when there is positive growth in real GDP
• During periods of real GDP growth, employment of resources increases, and the general price level of the economy usually begins to rise more rapidly (inflation)
• Consumer and business confidence increases
• Real wage increase - Higher demand for labour
• Decrease of business inventory

• A peak represents the cycle’s maximum real GDP
• When the ecconomy reaches a peak, unemployment of resources has fallen substantially, and the general price level may be rising rapidly
• The economy is likely to be experiencing inflation
• Increase in real wages
• Very high consumer/business confidence
• High aggregate expenditure

• Following the peak, the economy begins to experience falling real GDP
• If the contraction lasts six months or more, it is a recession
• Increases in the price level may slow down a bit

• A trough represents the cycle’s minimum level of GDP
• There may now be widespread unemployment
• A trough is followed by a new period of expansion

• Economic growth over long periods of time is highly desirable
• Growth in real output provides opportunities to achieve higher incomes and higher standards of living
• During expansions, the economy usually experiences high inflation, which is not good for the economy
• During contractions, the economy usually experiences high levels of unemployment
• Reducing the intensity of expansions and contractions would lesson the problems

• An indicator is used to predict future financial economic trends
• Three categories of Indicators

• Signal future events
• Bond yields are a good leading indicator of the stock market because bond trades anticipate and speculate trends in the economy
• New housing starts, money supply, and M2 are considered good indicators
• Also: Share prices, building approvals, levels of inventory, new orders, business/consumer confidence, consumer expectations, new employment

• Follows an event
• Ability to confirm that a pattern is occurring
• Unemployment is a common lagging indicator
• If the unemployment rate is rising, it indicates that the economy has been doing poorly
• Also: CPI, consumer debt, interest rates

• Change at approximately the same time as the conditions
• Change at the same time as the economy or stock market
• Personal incomes
• Also: GDP, Sales, Manufacturing