December 11, 2011

Business Cycles

Business cycles occur when economic activity speeds up for some period and slows down for some period and then once again speeds up.

A recession is a fall in aggregate output. In USA, a recession is said to occur when real GNP has declined for two successive quarters.

Okun's Law:

For every 2 percent that GNP falls relative to potential GNP, the unemployment rate rises 1 percentage point.

Characteristics of Business Cycles

At slowdowns of the economies, consumer purchases decline sharply while business inventories increase unexpectedly especially that of automobiles and other durable goods.

Business curb production, real GNP falls.

The demand for labor falls leading to layoffs and higher unemployment.

As demand falls, prices of many commodities fall sharply.

Business profits also fall sharply.

Original Knol - 217

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