Effects of Business Cycles Essay

1737 Words Nov 4th, 2008 7 Pages
Introduction
In general the economy tends to experience different trends. These trends can be grouped as the business/trade cycle and may contain a boom, recession, depression and recovery. A business/trade cycle (see figure 1) is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real Gross Domestic Product (GDP) and other macroeconomic variables. Samuelson and Nordhaus (1998), defined it as ‘a swing in total national input, income and employment, usually lasting for a period of 2 to 10 years, marked by widespread expansion or contraction in most sectors of the economy’. These fluctuations in economic activity usually have implications on employment, consumption, business confidence,
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During a recession business people spend less because sales are fail and businesses do what they can to reduce their spending. They lay off workers, buy less merchandise and postpone plans to expand. As a result of this business suppliers also lay off workers and reduce spending.

Depression - This is the state of the economy where there are high levels of unemployment, a decline in annual income, and overproduction. There are also low interest rates, low consumer demand and low profitability.

Recovery - This is the stage where businesses begin to improve a bit, firms hire a few more workers and increase their orders of materials from their suppliers. Increased orders lead other firms to increase production and rehire workers. More employment leads to more consumer spending, further business activity, and still more jobs. There is also rising interest rates, rising levels of investment and profits.

Policies Applied to Address Critical Economic Issues at each Stage

Recession and the USA Economy
The USA economy is in a recession when real output declines in two successive quarters. An economy goes into recession when there is a decline in a country's real Gross Domestic Product (GDP) for two or more successive quarters of a year. According to Former U.S. Federal Reserve Chairman Alan Greenspan, American economy may slip into recession by the end of the year. The USA

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