HGov: Business Cycle


Business-Cycle
Economies are always changing. Economies experience recurring periods of growth and decline in economic activity. This recurring pattern is called the business cycle. The business cycle consists of four phases. These phases include a period of growth and a period of decline as well as the turning points that mark the shift from one period to the next.

A period of economic growth is known as an expansion. During this phase of the business cycle, economic activity generally increases from month to month. The longest expansion of the U.S. economy lasted a decade, but expansions typically run out in three to five years. The point at which the expansion ends marks the peak of the business cycle. At that peak, economic activity has reached its highest level. The peak also marks the start of a decline in economic activity. Economists do not know when a peak is occurring until they look back at the economic data.At that time they designate one month as the peak phase.

Following the peak comes the contraction phase of the business cycle. A contraction is a period of general economic decline marked by a falling GDP and rising unemployment. One of the longest contractions on record (43 months) occurred at the start of the Great Depression. However, since 1945, contractions have averaged about 10 months. The lowest point of a contraction is called the trough. Like the peak, the trough marks a turning point. Once the economy hits bottom, a new expansion begins.

The term business cycle implies that expansions and contractions occur at regular, predictable intervals. But, the opposite is true. Business cycles are irregular in both length and severity. This makes peaks and troughs difficult to predict. Nonetheless, economists attempt to do that using three economic indicators: GDP, inflation rate, and unemployment rate. Economists categorized the indicators they use to track the business cycle based on whether they signal a future change, an ongoing change, or a change that has already begun.

unemployment intro
Every economy goes through prosperous times and hard times. Such cycles of growth and decline are the cause of cyclical unemployment. This type of unemployment occurs during periods of contraction. At such times, economic activity slows, GDP decreases, and people lose their jobs. People who experience cyclical unemployment often have trouble finding new jobs that use their skills. Few businesses hire new workers during an economic decline. Moreover, the labor market may be glutted with equally qualified workers who are in the same situation. Many people are forced to take jobs outside their chosen fields or live on unemployment benefits while they wait for the economy to improve.

People who choose to change jobs are in transition. Their skills are still in demand and the time they spend without a job is usually short. The same cannot be said of those who experience structural unemployment. Structural unemployment comes about mainly when advances in technology reduce the demand for certain skills. What can people do to become employable again? They might consider returning to school to develop new skilled that employers want. Or they might be able to adapt existing skill to qualify for new ob opportunities.

A person who has left one job and is looking for another is what economists call frictional unemployment. It applies to people who change jobs as well as people seeking their first jobs. Frictional unemployment is usually short term, lasting only as long as is needed to find the right job. Frictional unemployment can create temporary hardship for the jobless person. It also represents lost production for an employer trying to fill a position. However, a certain amount of frictional unemployment is unavoidable when people are free to change jobs at will. Changing jobs is usually good for the economy because it can reallocate labor resources to their best use.

In some markets, demand for labor depends on the season. Seasonal unemployment occurs when businesses shut down or slow down for part of the year because of weather. Tourism, construction, and agriculture are among the industries that typically lay people off for part of the year.

Consumer Price Index

One cause of inflation is an increase in the money supply that results in too many dollars chasing too few goods. Runaway inflation can send an economy into a tailspin. This is the reason why economists keep a close eye on inflation.

A cause of inflation is an increase in overall demand. The spending that makes up GDP comes from households, businesses, government, and foreign buyers. Sometimes these four sectors together try to purchase more goods and services than the economy can produce. This increase in overall demand results in demand-pull inflation. The extra demand by buyers exerts a pull on prices forcing them up.

Inflation can also be caused by increases in the cost of the factors of production. Higher production costs reduce the economy’s ability to supply the same output at the same price level. The result is cost-push inflation. The rising cost of land, labor, or capital pushes the overall price level higher. Cost-push inflation is often triggered by increases in energy prices. Rising fuel costs affect every link in the supply chain, from farms and factories to retail stores. The higher costs of making and moving goods are then passed on to consumers in the form of higher prices.

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