causes of economic (business) cycles

8/17/2019 Causes of Economic (Business) Cycles

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5.2 CAUSES OF ECONOMIC (BUSINESS) CYCLESMONETARY CAUSES (ENDOGENOUS)

• At the end of a recession phase, the growth in money supply is low.

• The demand for credit is weak and interest rates are low.

• Banks make their profit by lending out money.

• Interest rates are lowered to increase assets (loans) so the money supply

increases.

• With increased economic actiity, money is borrowed but as interest rates

increase, indiiduals borrow more money before a further increase in interestrates can occur.

• Interest rates become so high that people! businesses begin to e"perience debt

problems.#

• This leads to bankruptcy which in turn leads to a decrease in production, income

and e"penditure.

• Turning point in the cycle is reached as the demand for credit, money creationand money supply decrease.

• $eople%s standards of liing declines and people struggle for surial by

becoming part of the informal sector.

REAL CAUSES (ENDOGENOUS)&auses related to

• 'esign of new profitable production processes

• 'iscoery and implementation of new technology and machinery

• &reation and e"ploitation of new markets

•

'iscoery of new resources• pswing phase starts when there is an upswing in the economies of trading

partners.

• They spend more, import more and can e"port more.

• "port enterprises can produce more, employ more factors of production.

• Increased production needs more intermediate products so production,

employment and inestment increase.

• Increased employment results in higher income and consumption and all sectors

e"pand.

• *ew factories start to produce.

•Increased supply.

• All goods are not sold resulting in bankruptcy.

• Increased unemployment follows.

• 'ecline in production and inestment.

EXOGENOUS CAUSESConsumer n! In"es#or Con$%!en&e

• As people are pessimistic at the beginning of an upswing phase, they don%t

borrow, inest or spend and this dampens reial.

• +ptimism now oercomes pessimism this leads to an oerestimation of ability

and demand for products increase.• Borrow too much money, produce and consume too much.



• ndertakings get into financial difficulty.

• When this the downturn starts.

• As people become pessimistic again, this lengthens and deepens the recession.

• N#ur' !%ss#ers e.. oil platforms in gulf r* S#o&+ mr+e# &rs,

Ne- E&onom%& r!%m

• Traditional monetarists belieed that goernment should not interene and that -

only created shocks to the cycle e.g. boom and bus

• eynes promoted fine tuning of economy by -

• aimed at smoothing business cycles to preent the boom / bust cycle

• Anti0cyclical monetary policy is used

• 1mall increases in r#es before the economy oerheats help to preent ery high

peaks

• 2.34 5 0 6uarter 5 point / 34 basis points is used rather than 7 or 3 5



/. FEATURES UNDERINNING FORECASTINGo Leading indicators: where the economy is headed and occur before the

peak or trough e.g. increase in business start0ups, new business carsales, share prices, residential building plans

o Lagging indicators: e"plain where the economy has been. They occur

after a peak or trough e.g. increased inestment, hours spent inconstruction,

o Coincident: occur at the same time e.g. retail sales, real -'$ increase

o sing known alues to predict a trend (or the future) is called

extrapolation

o +ne method of e"trapolation is using moving averages

o We use uneen number of years e.g. #, 4 or 8 year moing aerage

o Add up the data for #, 4 or 8 years and diide by the number of years

Yer Nom%n'GD 0er &0%#(R)

Re'GD 0er &0%#(R)

79:8 ;:7 79999

79:< ;<: 32384

79:9 4## 32::2

7982 4:9 377:2

7987 :7; 374#4

7983 :8: 37#:4

798# <7: 37<2<

798; 9<7 33:73

7984 7289 33;<3

798: 7797 33;87

7988 7393 37979798< 7;42 332#3

7989 7:9# 33#;8

79<2 3324 3#39<

79<7 3;9; 3#987

79<3 38:: 3###4

79<# #29; 33#<8

79<; #4;4 3#22:

79<4 ;223 333#3

79<: ;4<# 3784#

79<8 43;; 378#9

79<< :7:; 337<#

79<9 83;8 333;7

7992 <783 37872

7997 97:< 372;47993 722:8 32782

799# 773<: 7999:

799; 7342; 32374

7994 7#932 32;73

799: 74#:< 32<;9

7998 7::99 3294:

799< 7882; 32:3:

7999 7<999 32:8#

3222 37729 37729

3227 33<94 373:4

3223 34:;; 37498

322# 3827: 3788;

322; 39723 337;9

causes of economic (business) cycles

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