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Understanding Business Cycles: Presenter's Name Presenter's Title DD Month Yyyy
Understanding Business Cycles: Presenter's Name Presenter's Title DD Month Yyyy
INTRODUCTION
The study of business cycles is the study of short-term economic
fluctuations.
Factors that may affect business cycles are some of the same factors
that affect economic growth (e.g., labor productivity, money supply,
inflation, and technology).
Lower
GDP
Copyright 2014 CFA Institute
Consumers and
companies
purchase more
Companies
increase capital
spending
Increase
GDP
Copyright 2014 CFA Institute
Late
Expansion
Accelerating
rate of growth
Peak
Decelerating rate
of growth
Contraction (Recession)
Declines
Unemployment
rate falls to low
levels.
Unemployment
rate continues to
fall.
Consumer and
business
spending
Upturn
becomes more
broad based.
Capital spending
expands rapidly,
but the growth rate
of spending starts
to slow down.
Inflation
Inflation remains
moderate and may
continue to fall.
Inflation picks
up modestly.
Inflation further
accelerates.
Characteristic
Economic
activity
Employment
MONETARISTS
Those following the monetarist school of thought object to the Keynesian
approach because Keynesian theory
- does not consider the role of the money supply.
- is not logical in light of utility-maximizing market participants.
- ignores the long-term cost of government intervention.
- does not consider the unpredictability of the timing of fiscal policy changes on
the economy.
Monetarists advocate for a steady increase in the money supply and a limited
role of government.
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PRODUCTIVITY MEASURES
Labor force indicators:
The unemployment rate (the ratio of the number of unemployed persons to the
labor force) lags the current environment.
Issues:
- Distortions from discouraged workers: The number of unemployed may drop
because workers become discouraged and may increase when they rejoin
the workforce to resume searching.
- Reluctance of employers to lay off workers when business slows and to hire
when business increases.
Payroll growth does not fully cover employment at small businesses.
Hours worked (including overtime) and use of temporary workers are indicators
of slowing and recovering businesses.
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INFLATION
Inflation is an increase in the level of prices in the economy.
- The inflation rate is the percentage change in a price index.
- The purchasing power of money decreases.
- The liability of the borrower decreases if the loan has fixed monetary terms.
Deflation is a sustained decrease in the aggregate price level (negative
inflation rate).
- The purchasing power of money increases.
- The liability of the borrower increases if the loan has fixed monetary terms.
Hyperinflation is an extremely fast increase in the aggregate price level.
- It generally occurs when government spending is not backed with tax
revenues and the money supply is increased (or unlimited).
Disinflation is a decline in the inflation rate.
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MEASURING INFLATION
A price index reflects the weighted average price of a basket of goods and
services, with the index = 100 at a specified period of time (that is, base year).
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INFLATION INDICES
Price indices may differ with respect to scope and weights on goods and
services.
Examples:
- The consumer price index (CPI) is used to track inflation within a given
economy.
- In the United States, the CPI covers only urban areas.
- It is used by US Treasury inflation protected securities (TIPS) and other
contracts.
- The personal consumption expenditures (PCE) price index covers all
consumption using surveys.
- The producer price index (PPI), also known as the wholesale price index
(WPI), tracks inflation in prices of goods and services to domestic producers.
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ECONOMIC INDICATORS
An economic indicator is a measure that provides information about the state
of the overall economy.
A leading economic indicator is a measure that has turning points that
precede changes in the economy.
A coincident economic indicator has turning points that coincide with the
changes in the economy.
A lagging economic indicator has turning points that are later than changes
in the economy.
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Coincident Economic
Indicators
Aggregate real personal
income
Employees on nonfarm
payrolls
Industrial Production Index
Manufacturing and trade
sales
Lagging Economic
Indicators
Average duration of
unemployment
Inventory-to-sales ratio
Change in unit labor costs
Average bank prime lending
rate
Commercial and industrial
loans outstanding
Ratio of consumer
installment debt to income
Change in consumer price
index for services
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Leads an expansion
Leads an expansion
Leads an expansion
Increase in Industrial
Production Index
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