Business cycle and

BUSINESS TRENDS ________

DISCUSSION One of the Inherent (невід'ємний) characteristics of any market-directed

economy is a tendency for economic activity to proceed in a series of fits and starts. No economist has, therefore, proved a better prophet than President Calvin Coolidge, who once delivered the following remark: "The business cycle of the country will get better or worse'.'

• How would you interpret this astonishing remark?

• What do you think it means?

• Can you give some examples?

reading BUSINESS CYCLE

I. The Level of Economic Activity

America's economic history has been marked by both good times and bad times. In good times, jobs are plentiful, stores are busy and the nation's factories hum with activity. In bad times, just the opposite is true. Jobs are scarce, business is slow, and factories and machines stand idle. These changes are shown in Figure 1, which illustrates business activity since 1905. As you can see, changes in the level of the nation's economic activity have been the rule rather than the exception. II. The Business Cycle: the Ups and Downs of the American Economy

The ups and downs in the level of economic activity are commonly referred to as the business cycle. In Figure 1, the 0 line represents what economists decided should have been the normal level of activity for a par­ticular year. The jagged line indicates the extent to which actual economic activity was above or below the norm.

The graph shows that, although no two cycles have been identical in either duration or intensity, there has been a consistent up-and-down pat­tern through the years. Economists studying business cycles have identi-

52 PART I. ECONOMICS

Figure 1. United States Business Activity since 1905 (from AmeriTrust, Cleveland)

Recession. During a recession, economic activity goes into a decline. Consumers buy less than before. The decline in consumer demand prompts firms that service consumers to cut back on their own orders. The pace of manufacturing slows. As workers are laid off, the unemployment rate rises. Salaries and wages fall, consumer demand is further reduced, and the recession intensifies.

Contrary to your expectations, prices do not necessarily fall during a recession. In those industries in which competition is keen, prices do come down with the decline in sales. Where there is little competition, however, prices are likely to be 'sticky' the economists" way of saying that prices tend to stay where they are. With little or no competition to undercut them, managers are able to maintain prices by laying off workers and reducing output.

Trough, or Depression. Sooner or later, a recession will bottom out into what economists refer to as the trough of the cycle. When the recession is mild and short-lived, the trough will be reached before the levels of unem­ployment and business shrinkage become serious. At other times, reces­sions have reached very low levels of output and employment and extended over long periods of time before running their course. This pat­tern was especially persistent in the years before World War II. Econo­mists in those years were likely to use the term 'depression' in describing the trough of the business cycle.

Expansion, or Recovery. In time, optimism creeps back into the eco­nomy. The level of spending begins to increase as consumers and business firms expand their buying and production. As more and more workers find jobs, unemployment drops. This process leads to an increase in income and the further growth of spending.

7 10. BUSINESS CYCLE AND BUSINESS TRENDS

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