@Bully
За следобеда.
BUSINESS CYCLES
Economists have always followed the periodic changes that occur in level of business activity. These
fluctuations are called business cycles. In this section, we will briefly define the term business cycle and
describe some of the data that are used to monitor business cycle developments.
Business Cycle Defined
In a free enterprise economy, plans and decisions are made independently by a large number of economic
agents. From time to time, imbalances between supply and demand will emerge and agents will not
always be able to make the necessary adjustments to remove the imbalance. The inability to foresee and
plan for all contingencies leads, on occasion, to an accumulation of imbalances throughout the economy.
Such aggregate fluctuations are called business cycles.
Business cycles are recurring changes in economic activity. They do not follow any fixed periodic
pattern such as seasonal cycles. Furthermore, each cyclical episode can differ with respect to the
duration, depth, and diffusion of the cycle.
Although each business cycle is unique, there are enough similarities to make some general statements
about the performance of the economy over the course of a typical cycle. Let us enter the process with an
economic expansion getting underway.
19
The process of expansion can be fueled by a number of forces including an anti-recessionary
macroeconomic policy, foreign demand, underlying growth expectations, and the inherent forces that
bring a contraction to an end. The latter can include the influence of low mortgage interest rates on
housing demand. Furthermore, low interest rates and the ready availability of skilled labor, plant
capacity, material inputs and credit may lead entrepreneurs with underlying confidence in the economy to
seize the opportunity and start new projects. Such responses can go a long way to starting an expansion
phase.
The expansion impulse will spread quickly through the economy. Increases in earnings in the expanding
sectors will generally lead to increased retail sales throughout the economy. New orders will expand in
all sectors and bring the recession to an end. In the early phase of the expansion, output can be increased
with only small increases in employment. Thus, productivity growth (the growth of output per labor
hour) is likely to be rapid. As a consequence, profits are likely to respond quickly.
As the expansion goes on, capacity constraints loom in the not-too-distant future and delivery lags begin
to lengthen. At the same time, interest costs and equipment prices are favorable. Thus, contracts and
orders for investment goods begin to rise, and, with some lags, investment expenditures increase as well.
At this point, the expansion is well under way. GDP quickly surpasses its previous peak and a mood of
optimism spreads over the economy. There is a willingness to undertake new activities and the expansion
is self-reinforcing. Although there may be pauses in growth due to brief inventory adjustments, the
strength of consumer demand and investor confidence can maintain an expansion for a long period of
time.
Nevertheless, forces that can generate a recession do appear, and if a few of them come together, the
expansion can reach its peak. First, as the expansion eliminates all slack in the economy, shortages of key
resources might create physical barriers to further expansion. Second, as capacity is reached, costs of
production will go up, profit margins decline and productivity growth slows. Growth expectations and
the mood of optimism may begin to erode. Third, unless the monetary authority accommodates all
inflationary pressures, the expansion is likely to lead to increased interest rates. Home building is often
the first sector affected by interest rate pressures. Fourth, a vigorous expansion may lead to a too rapid
buildup of inventories and capital goods.
At this stage, the economy is perched precariously between a slowdown in the expansion and a recession.
If the balance of contractionary forces grows the economy will enter a recession.
After the peak of economic activity, many firms will find their inventories expanding rapidly as demand
falls. There are pressures on profits and many firms might be experiencing financial difficulties. Cash
flow might be insufficient to service debt incurred during the expansion and the number of bankruptcies is
likely to increase. Once the contraction is clearly underway, unemployment will increase. The forces of
recession will also be self-reinforcing.
However, there are a number of forces that make recessions rather short phases. First, consumption and
investment plans are to a large extent determined by long-run expectations. Second, competitive
pressures lead firms to take advantage of the recession to improve efficiency and increase market share.
Third, the depreciation of capital leads to new investment demand. Finally, policy-makers are likely to
take action to shorten a recession and this drives expectations. Thus, most recessions come to an end
within a year and before the toll of unemployment has a major impact on the well being of society.
За следобеда.
BUSINESS CYCLES
Economists have always followed the periodic changes that occur in level of business activity. These
fluctuations are called business cycles. In this section, we will briefly define the term business cycle and
describe some of the data that are used to monitor business cycle developments.
Business Cycle Defined
In a free enterprise economy, plans and decisions are made independently by a large number of economic
agents. From time to time, imbalances between supply and demand will emerge and agents will not
always be able to make the necessary adjustments to remove the imbalance. The inability to foresee and
plan for all contingencies leads, on occasion, to an accumulation of imbalances throughout the economy.
Such aggregate fluctuations are called business cycles.
Business cycles are recurring changes in economic activity. They do not follow any fixed periodic
pattern such as seasonal cycles. Furthermore, each cyclical episode can differ with respect to the
duration, depth, and diffusion of the cycle.
Although each business cycle is unique, there are enough similarities to make some general statements
about the performance of the economy over the course of a typical cycle. Let us enter the process with an
economic expansion getting underway.
19
The process of expansion can be fueled by a number of forces including an anti-recessionary
macroeconomic policy, foreign demand, underlying growth expectations, and the inherent forces that
bring a contraction to an end. The latter can include the influence of low mortgage interest rates on
housing demand. Furthermore, low interest rates and the ready availability of skilled labor, plant
capacity, material inputs and credit may lead entrepreneurs with underlying confidence in the economy to
seize the opportunity and start new projects. Such responses can go a long way to starting an expansion
phase.
The expansion impulse will spread quickly through the economy. Increases in earnings in the expanding
sectors will generally lead to increased retail sales throughout the economy. New orders will expand in
all sectors and bring the recession to an end. In the early phase of the expansion, output can be increased
with only small increases in employment. Thus, productivity growth (the growth of output per labor
hour) is likely to be rapid. As a consequence, profits are likely to respond quickly.
As the expansion goes on, capacity constraints loom in the not-too-distant future and delivery lags begin
to lengthen. At the same time, interest costs and equipment prices are favorable. Thus, contracts and
orders for investment goods begin to rise, and, with some lags, investment expenditures increase as well.
At this point, the expansion is well under way. GDP quickly surpasses its previous peak and a mood of
optimism spreads over the economy. There is a willingness to undertake new activities and the expansion
is self-reinforcing. Although there may be pauses in growth due to brief inventory adjustments, the
strength of consumer demand and investor confidence can maintain an expansion for a long period of
time.
Nevertheless, forces that can generate a recession do appear, and if a few of them come together, the
expansion can reach its peak. First, as the expansion eliminates all slack in the economy, shortages of key
resources might create physical barriers to further expansion. Second, as capacity is reached, costs of
production will go up, profit margins decline and productivity growth slows. Growth expectations and
the mood of optimism may begin to erode. Third, unless the monetary authority accommodates all
inflationary pressures, the expansion is likely to lead to increased interest rates. Home building is often
the first sector affected by interest rate pressures. Fourth, a vigorous expansion may lead to a too rapid
buildup of inventories and capital goods.
At this stage, the economy is perched precariously between a slowdown in the expansion and a recession.
If the balance of contractionary forces grows the economy will enter a recession.
After the peak of economic activity, many firms will find their inventories expanding rapidly as demand
falls. There are pressures on profits and many firms might be experiencing financial difficulties. Cash
flow might be insufficient to service debt incurred during the expansion and the number of bankruptcies is
likely to increase. Once the contraction is clearly underway, unemployment will increase. The forces of
recession will also be self-reinforcing.
However, there are a number of forces that make recessions rather short phases. First, consumption and
investment plans are to a large extent determined by long-run expectations. Second, competitive
pressures lead firms to take advantage of the recession to improve efficiency and increase market share.
Third, the depreciation of capital leads to new investment demand. Finally, policy-makers are likely to
take action to shorten a recession and this drives expectations. Thus, most recessions come to an end
within a year and before the toll of unemployment has a major impact on the well being of society.
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