Economics – Reply to Peer’s Discussion Question

Peer Response – 1

 

According to Bruce, S.L., McConnell, C.R., & Flynn, S.M. (2014), a Business Cycle is the “recurring increases and decreases in the level of economic activity over periods of time.”  In other words, the business cycle describes the rise and fall in production output of goods and services in an economy. Business cycles are generally measured using rise and fall in real – inflation-adjusted – Gross Domestic Product (GDP).  This includes output from the household, the nonprofit sector and the government sector, as well as business output.

The two primary phases of the business cycle are Recession and Expansion.  How do these two phases differ?

Recession:

  • Decline in Gross Domestic Product (GDP)
  • Decline in Income
  • Decline in employment
  • Increase in unemployment
  • Inflation falls
  • Lasts 6 months or more
  • Widespread contraction of business activity in many sectors

Expansion:

  • Rise in real Gross Domestic Product (GDP)
  • Rise in income
  • Rise in employment
  • Decline in unemployment
  • Inflation occurs
  • Usually occurs after a recession

Expansion is measured from the trough (or bottom) of the previous business cycle to the peak of the current cycle.  Recession is measured from the peak to the trough. In the United States, the Business Cycle Dating Committee of the National Bureau of Economic Research determines the dates for business cycles. Committee members do this by looking at real Gross Domestic Product (GDP) and other indicators that include real income, employment, industrial production, and wholesale-retail sales. Combining these measures with debt and market measures helps understand the causes of expansions.

Where does Expansion in the business cycle occur?  It is between the trough and the peak.  That’s when the economy is growing. The Gross Domestic Product (GDP) is increasing and its growth rate is in the 2 to 3 percent range.  Unemployment reaches 4.5 to 5 percent. Inflation is close to 2 percent.  The stock market is in what is known as a Bull Market (a market in which share prices are rising, encouraging buying). A well-managed economy can remain in the expansion phase for years. It is sometimes referred to as a Goldilocks Economy (an economy that is not too hot or cold, in other words it sustains moderate economic growth, has low inflation, which allows a market-friendly monetary policy).

The expansion phase nears its end when the economy overheats. That’s when the Growth Domestic Product (GDP) growth rate is greater than 3 percent. Inflation is greater than 2 percent and may reach the double digits. Investors are in a state known as irrational exuberance (investors believe the price of an asset will continue to increase that they forget about the underlying value).  That’s when investors will  create what is known as asset bubbles.  This is when investors bid up the price of an asset – such as housing prices or stock prices – and the asset becomes over-inflated.

The peak is the second phase. It is the month when the expansion transitions into the contraction phase.

The third phase is contraction. It starts at the peak and ends at the trough. Economic growth weakens and Gross Domestic Product (GDP) growth falls below 2 percent.

So, when does the Recession in the business cycle occur?  It occurs when the contraction cycle turns negative. Mass layoffs become the leading story in the news. The unemployment rate begins to rise. It doesn’t happen until toward the end of the contraction phase because it is a lagging indicator.  Businesses wait to hire new workers until they are sure the recession is over.

It is good to remember that each business  cycle has four phases. They don’t occur at regular intervals, so it cannot be said that every 12 years an Expansion or a Recession will happen. But they do have recognizable indicators.  Throughout the years, the economy has seen bad times, but one needs to remember that good times will follow.  Patience during the bad times is a virtue every consumer, as well as businesses and investors, must maintain when the economy is in a downward turn.  The good times will come – they always do – just need to be a little patient.

 

Peer Response – 2

 

Business cycles are alternating rises and declines in the level of economic activity, sometimes over several years (Brue, McConnell, & Flynn, 2014). Recessions and expansions come and go, sometimes lasting short periods of time, and occasionally lasting for quite a while. Recessions are a period of declining GDP, typically joined by lower income and higher unemployment (Brue et al, 2014). For example, the financial crisis in 2007 and 2008 in the United States was a recession. According to bea.gov, real GDP dropped starting in Q4 of 2008, though exactly which quarters and for how long is somewhat up for debate. In addition to real GDP dropping, unemployment rose and a staggering 750,000 jobs were lost per month for over six months straight. These are very common symptoms of a recession. Typically, real GDP will decline, as will inflation, but unemployment will rise (meaning a loss in jobs). This downturn tends to last six months or more to be considered a true recession.

Expansion, on the other hand, tends to be opposite of a recession, and typically follows one. During an expansion, real GDP will increase, as will inflation, contrarily unemployment will fall. As an example in 2007 I was 19 years old and started heavily investing in my 401k. While the initial year was a little rough, since then I have enjoyed great gains virtually every single year. The economy now is at all time highs in virtually every category, except unemployment, which is near all time lows.

The most interesting thing about recessions and expansions, specifically the rise and fall of the stock market, is what drives it. When I first started aggressively following stocks and market trends, I was always confused when a company would announce better than analyst expected earnings, but the stock would plummet. For example, ABC company could announce $1b in revenue for Q1, with analysts expecting $950m. However, if the “street”, or the general public, was expecting $1.1b, then the actuals are a miss and the stock could drop. I’ve learned trying to understand it is virtually impossible, as even the best market analysts are often wrong.

 

Last Updated on February 11, 2019 by EssayPro