business cycle

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Business cycle

Repetitive cycles of economic expansion and contractions. The official peaks and troughs of the US cycle are determined by the National Bureau of Economic Research in Cambridge, MA.

Business Cycle

The continuous expansion and contraction of economic growth in fairly regular intervals. That is, a business cycle involves GDP growth and the creation of wealth for a period of time, followed by overheating and a recession. When the recession reaches its bottom the business cycle starts again. Some economists believe that the length and strength of business cycles are easily predictable, while others dispute this. A business cycle is seen as an inevitable part of the capitalist system. It is informally called a boom-and-bust cycle. See also: Industry Life Cycle, Kondratiev Wave.

business cycle

The somewhat irregular but recurring periods of change in economic activity over time. A business cycle is generally divided into four stages: expansion, prosperity, contraction, and recession. The stage in which an economy operates has a significant impact on a firm's profitability and prospects. This impact is especially severe with respect to firms that experience large swings in sales and profits. Many analysts believe stock prices tend to lead the business cycle. Therefore, it is felt that bull markets begin before a period of expansion and that bear markets begin before a period of contraction.

business cycle

fluctuations in the level of business activity in an economy brought about by changes in demand conditions, particularly increases and decreases in investment spending. The business cycle is characterized by four phases, with the economy moving upwards from ‘depression’ through ‘recovery’ to ‘boom’ and back through ‘recession’ to depression once again. The depression stage of the cycle is characterized by a very low level of demand relative to supply capacity, accompanied by low levels of output, unsold stock and high unemployment. As demand picks up in the recovery stage, stock levels fall and output and employment increases. Boom conditions are characterized by full-capacity levels of output and employment, but with a tendency for the economy to ‘overheat’, producing inflationary pressures. The ending of a boom is followed by a period of recession, with falling demand leading to modest falls in output and employment at first but then accelerating into depression as demand continues to fall. In practice, however, governments attempt to use anticyclical FISCAL POLICY and MONETARY POLICY to stabilize the economy, aiming in general to keep total demand in balance with the supply capabilities of the economy thus avoiding undesirable output- and employment-losses as well as containing inflation. See ECONOMIC POLICY.
Business cycleclick for a larger image
Fig. 20 Business cycle. Fluctuations in the level of economic activity.

business cycle

or

trade cycle

fluctuations in the level of economic activity (ACTUAL GROSS NATIONAL PRODUCT), alternating between periods of depression and boom conditions.

The business cycle is characterized by four phases (see Fig. 20 ):

  1. DEPRESSION, a period of rapidly falling AGGREGATE DEMAND accompanied by very low levels of output and heavy UNEMPLOYMENT, which eventually reaches the bottom of the trough;
  2. RECOVERY, an upturn in aggregate demand accompanied by rising output and a reduction in unemployment;
  3. BOOM, aggregate demand reaches and then exceeds sustainable output levels (POTENTIAL GROSS NATIONAL PRODUCT) as the peak of the cycle is reached. Full employment is reached and the emergence of excess demand causes the general price level to increase (see INFLATION);
  4. RECESSION, the boom comes to an end and is followed by recession. Aggregate demand falls, bringing with it, initially modest falls in output and employment but then, as demand continues to contract, the onset of depression.

What causes the economy to fluctuate in this way? One prominent factor is the volatility of FIXED INVESTMENT and INVENTORY INVESTMENT expenditures (the investment cycle), which are themselves a function of businesses’ EXPECTATIONS about future demand. At the top of the cycle, income begins to level off and investment in new supply capacity finally ‘catches up’ with demand (see ACCELERATOR). This causes a reduction in INDUCED INVESTMENT and, via contracting MULTIPLIER effects, leads to a fall in national income, which reduces investment even further. At the bottom of the depression, investment may rise exogenously (because, for example, of the introduction of new technologies) or through the revival of REPLACEMENT INVESTMENT. In this case, the increase in investment spending will, via expansionary multiplier effects, lead to an increase in national income and a greater volume of induced investment. See also DEMAND MANAGEMENT, KONDRATIEF CYCLE, SECULAR STAGNATION.

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Indeed, ABCT as it has been developed by numerous economists understand the cause of the malinvestment that triggers the business cycle to be due to artificially low interest rates (Garrison, 1989; 2001, pp.
It shows that the business cycles of the two economies have tendency to follow each other's movements.
Bouwman (2009) finds that many mergers take place at the peak of the business cycle, while these enjoy significantly higher announcement returns (increase in stock price when the merger is announced).
Recognizing the limitations of the extant methodologies and datasets in identifying the business cycle timely, our paper utilizes a "realtime" dataset, Google Trends, in a multivariate Markov-switching framework to improve the timeliness of peak identification.
The risk of job displacement is assumed to be closely associated with the business cycle. He finds a sizable cost of business cycles related to the importance of displacement risks.
During these periods changes in the detailed characteristics of business cycles of particular countries have occurred, but have not affected the general characteristics of the business cycle (see e.g.
For the mainstream, smoothing the business cycle is job one.
To approach the business cycle, investors may choose from two ways one of which is to attempt to spot the turning points and shift asset allocation between various asset classes accordingly and the second is to ignore the business cycle completely and concentrate on picking good companies or identifying investment themes.
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Standard textbook discussions and analyses of movements in the business cycle distinguish between the four phases--sometimes called stages--of expansion, peak, recession, and trough, with each of these defined in terms of changes in real gross domestic product (GDP).
Many of these studies find channels through which shocks originating in the United States affect the business cycle of the euro area (Neri and Nobili 2006; Favero and Giavazzi 2008; Berger and Harjes 2009).
An interesting observation in this chapter concerns how the popularity of certain terms changes with the development of the theory and perceptions about the nature of the business cycle. Thus, as the view of the business cycle gradually changes from one of a temporary crisis with an unsystematic character, to one which emphasises a degree of regularity and the existence of a propagation mechanism inherent in the working of capitalist economies, the word cycle comes to supplant crisis in discussion.