The cycle of an economist
Day 11: “An economical bike ride”
In todays blog I will be going over the most common lifecycle of economics. I will cover the most common specific steps of a developing economic cycle. this cycle can and is sometimes referred as the “business cycle.”
The economic cycle is the fluctuation of the economy between periods of expansion (growth) and contraction (recession). Factors such as gross domestic product (GDP), interest rates, total employment and consumer spending can help to determine the current stage of the economic cycle. The definition can also been seen in the cense of a business. it is the downward and upward movement of gross domestic product (GDP) around its long term growth trend.
This definition was solely taken from one source so I have put the link to the article of origin of this definition bellow.
The length of a business cycle is the period of time containing a single boom and recession in sequence. these fluctuations typically involve shifts over time between periods of relatively rapid economic growth (expansion of booms) and periods of relevant stagnations or decline (contractions or recessions)
What on earth is it ?
The macro objective for growth is for growth to be, “Strong, sustainable and sustained over long periods of time” The strait diagonal line going from left to right on the graph to the left of this paragraph is the ideal strong and sustaining economic growth, also known as the “ Trend rate of growth line/Potential rate of growth line.” This is how we would love to have all economic growth but alas. The wavy line on the graph represents what happens in reality, also known as the “Actual growth line.” As we can it has many stages to its growth.
There are also two types of output areas of gaps, as they are more commonly known as. A positive output gap is the area created by the actual growth line above the trend rate of growth line. A negative output gap is the area created by the actual growth line beneath the trend rate of growth line. This is evidenced by the graph that is to the left of this paragraph. The blue represents economically profitable times in an economic cycle where as the red represents economically negative times in an economical cycle.
The cycle itself
The cycle itself consists of four different unique stages:
This is a section where growth is rampant. You and also see it as the highest point in the fluctuation of the actual growth line or a business cycle and it is the beginning of a contraction in the business cycle. The peak of the cycle also refers to the last month before several key economical indicators, such as employment and new housing starts, begin to decline and fall. it is at this point real GDP spending in an economy is at its highest point. In this stage there are also high profits.
This is a section where growth will be negatively increasing. Following a boom or a peak, the economy typically enters into a correction which is characterized by a recession where growth slows, employment declines (unemployment increases) and pricing pressures subside. The way that you would get an Economic recession if there are two successive quarters of negative economic growth.
This is a section where the stage where the period of declining business activity stops and the cycle transitions to expansion. This is basically just the opposite of a boom/peak. You and also see it as the lowest point in the fluctuation of the actual growth line. It is also the process of moving from contraction, also known as recession, to recovery, which increases business activity. In this stage there are also low profits.
This is a section where economically the cycle is recovering following a recession. The way that you would get an economic recovery if there are two successive quarters of improved and positive economic growth. Normally during an economic recovery period, GDP grows, income rises and unemployment falls as the economy rebounds. During this process the economy adapts and adjusts to the new conditions of the economy including to factors that triggered the recession in the first place.
All of the above information was taken from one sight and a YouTube video. This information on the econ cycle is a condensed version of this formation. You can go to the site to read in more depth if you wish and you can watch the video as well. I will also add a link to that sights.
Why are there fluctuations ?
The key is (SHOCKS). They are occurrence that no one can foresee and shock us thus rapidly and uniquely changing the cycle of any given economy. These shocks disallows the possibility of us getting the ideal, smooth and upward positive trend rate of growth line. These shocks can happen both on the demand (Reduction in AD) and supply side of things. An example of demand shocks was the 2010 recession. An example of a supply shocks are war and natural disasters.
That is all for today. I hope you found this blog informative and interesting. I think this was one of the most technically and fact heavy blogs that I have made in a while. I find this very interesting and engaging and I hope you feel the same way as this can clarify lots of people questions about economic cycles in general. Day 12 will be called “countering the pandemic.”