The business cycle model shows how
a nation's real GDP fluctuates over time
, going through phases as aggregate output increases and decreases.
What causes GDP to fluctuate?
GDP fluctuates
because of the business cycle
. When the economy is booming, and GDP is rising, there comes a point when inflationary pressures build up rapidly as labor and productive capacity near full utilization.
Does GDP change over time?
Real GDP accounts for changes in market value and thus narrows the difference between output figures from year to year
. If there is a large discrepancy between a nation's real GDP and nominal GDP, this may be an indicator of significant inflation or deflation in its economy.
What is the difference between business cycles and business fluctuations?
Business cycles are systematic changes in real GDP, and business fluctuations are changes that occur on an irregular basis
.
How does GDP evaluate the business cycle?
The business cycle model shows how a nation's real GDP fluctuates over time,
going through phases as aggregate output increases and decreases
. Over the long-run, the business cycle shows a steady increase in potential output in a growing economy.
What happens to the economy when GDP decreases?
Rising GDP means more jobs are likely to be created, and workers are more likely to get better pay rises. If GDP is falling, then
the economy is shrinking
– bad news for businesses and workers. If GDP falls for two quarters in a row, that is known as a recession, which can mean pay freezes and lost jobs.
How does the economic cycle affect businesses?
Unemployment tends to be low as growth in the economy creates new jobs. Recession:
falling levels of consumer spending and confidence mean lower profits for businesses – which start to cut back on investment
. Spare capacity increases + rising unemployment as businesses cut back and reduce stocks.
What is the business cycle What causes changes from one phase of the business cycle to another?
The business cycle is caused by
the forces of supply and demand—the movement of the gross domestic product GDP—the availability of capital, and expectations about the future
. This cycle is generally separated into four distinct segments, expansion, peak, contraction, and trough.
What is the point in the business cycle when the real GDP stops decreasing?
The trough phase
— it's the lowest point in economic contraction and real GDP stops falling.
Why does the GDP decrease?
A country's real GDP can drop as a result of
shifts in demand, increasing interest rates, government spending reductions and other factors
. As a business owner, it's important to know how this number fluctuates over time so you can adjust your sales strategies accordingly.
Do we want GDP to increase or decrease?
Economists traditionally use gross domestic product (GDP) to measure economic progress.
If GDP is rising, the economy is in solid shape, and the nation is moving forward
. On the other hand, if gross domestic product is falling, the economy might be in trouble, and the nation is losing ground.
What is happening with GDP?
GDP surged at an impressive 6.9% in the fourth quarter of 2021
to close out a year in which the measure of all goods and services produced in the U.S. increased 5.7% on an annualized basis. That came after a pandemic-induced 3.4% decline in 2020, a year that saw the steepest but shortest recession in U.S. history.
What is the relationship between unemployment and real GDP?
One version of Okun's law has stated very simply that when unemployment falls by 1%, gross national product (GNP) rises by 3%. Another version of Okun's law focuses on a relationship between unemployment and GDP, whereby
a percentage increase in unemployment causes a 2% fall in GDP
.
What happens during the business cycle?
Business cycles are comprised of
concerted cyclical upswings and downswings in the broad measures of economic activity—output, employment, income, and sales
. The alternating phases of the business cycle are expansions and contractions (also called recessions).
How does a decrease in GDP affect businesses?
If GDP is falling, then the economy is shrinking – bad news for businesses and workers. If GDP falls for two quarters in a row, that is known as a recession, which can mean
pay freezes and lost jobs
.
What does GDP tell us about business cycles quizlet?
What does gross domestic product (GDP) tell economists about business cycles?
GDP records, compared against each other chronologically, will illustrate a trend
. Depending on whether the trend is increasing or decreasing, economists will know at what stage of business cycle the country is in.
How does the unemployment rate fluctuate over the business cycle?
Unemployment
increases during business cycle recessions and decreases during business cycle expansions
(recoveries). Inflation decreases during recessions and increases during expansions (recoveries).
How do GDP affects the economy?
Investopedia explains, “Economic production and growth, what GDP represents, has a large impact on nearly everyone within [the] economy”.
When GDP growth is strong, firms hire more workers and can afford to pay higher salaries and wages, which leads to more spending by consumers on goods and services
.
Why has GDP growth slowed?
The U.S. economy slowed substantially in the third quarter amid an armada of obstacles, including
a surge in COVID-19 cases, supply chain bottlenecks, rising consumer prices and the fading effects of federal stimulus measures
.
How the business cycle can impact on business operations?
Businesses cut costs and lower prices after the recession
. By lowering the prices, it creates demand and customers start ordering again. Businesses start to hire new employees and expand.
How do businesses react to changes in a business cycle?
Businesses may react by
cutting their stock levels
. They don't want to be left with large levels of stock that they cannot sell. Businesses understand that in such periods they may experience cash flow problems, so by reducing their levels of stock they reduce their outflows.
How does the government affect the business cycle?
Variations in the nation's monetary policies, independent of changes induced by political pressures, are an important influence in business cycles as well.
Use of fiscal policy—increased government spending and/or tax cuts—is the most common way of boosting aggregate demand, causing an economic expansion
.
Why is business cycle expansion different from economic growth?
“Why do we consider a business-cycle expansion to be different from economic growth?” –
Long run growth depends on the number and skill of the labor force, technology, capital investment, and infrastructure
. -A business cycle expansion occurs when the unused resources are put back to work.
What keeps the business cycle going?
The business cycle keeps going because of
investment, interest rates and credit, consumer expectations or consumer confidence, external shocks such as disruptions in the oil supply, war, or natural disasters
.
When the economy reaches a trough in a business cycle?
A trough in the business cycle occurs
when a recession ends and economic recovery or expansion begins
. A recession's depth is determined by the magnitude of the peak-to-trough decline in the broad measures of output, employment, income, and sales.
