The Business Cycle
Characteristics of the Business Cycle
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Boom
In this phase we would expect the following characteristics: Main Characteristics: - High levels of economic growth - High levels of inflation - Low levels of unemployment - (zero cyclical unemployment) Other Characteristics: - High levels of confidence - Low levels of savings (everyone is spending as everyone is confident in the market and job security) - Levelling off of business profits (business profits have slowly stopped increasing) - High cash rates - High levels of durable and luxury good consumption - Lower budget deficit or government surplus Example: 2012-13 Mining Boom - Economic Growth - 4.3% (above 3-4% target rate) - Inflation - 3.8% (above 2-3% RBA target) - Unemployment - 4.9% (natural rate) - Cash rate - 4.75% (highest since the pre-GFC boom) - Budget Outcome - Deficit of $23.4 billion
Trough
In this phase we would expect the following characteristics: Main Characteristics: - Low levels of economic growth - Low levels of inflation - High levels of unemployment - (high cyclical unemployment) Other Characteristics: - Low levels of confidence - the emergence of the tragedy of the thrift - High levels of savings - job insecurity and lack of market confidence causes people to save - Lowest business profits (business profits have slowly stopped decreasing) - Low cash rates - Low levels of durable and luxury good consumption - High budget deficit Example: Global Financial Crisis (2008-09) - Economic Growth - 0.3% - Unemployment - 5.9% - Inflation - 1.1% - Budget Outcome - $54.8 billion deficit (highest ever recorded) - Cash rate - 3%
CPI-DISC
An easy acronym that helped me describe the characteristics of a phase of the business cycle is CPI-DISC that stands for: - Confidence - Business Profitability - Inflation rate - Level of durable and luxury good consumption - Interest rates - Level of household savings - Cyclical unemployment