May 27, 2022

Also: how to look at recessions and expansions as a business cycle.

A business cycle is a variation over time of the net national product (NNP) of a nation which is marked by upswings, downturns, and recovery periods. Business cycles are often measure with indexes such as industrial production or personal income explains Peter Decaprio. In most countries, this indicator is monitor regularly by government agencies. Economic activity increases during an expansion and decreases during a recession. According to Keynesian economics, simultaneous changes in national income have a multiplier effect. If income goes down, expenditures go down too. Resulting in further reduction of income and employment. Until all resources are unemployed.

It can be that increases in aggregate demand lead to increasing economic activity. While decreases, particularly sharp decreases, lead to worsening economic conditions.

In the simplest terms, a recession is when business activity slows and inflation rates drop and an expansion is when business activity speeds up and inflation increases.

The long-run impact of a business cycle depends. On how much potential output has been lost due to capital destruction during recessions. A permanent loss of that magnitude would only occur. If the economy experienced technological progress so rapid. As to render older capital obsolete which is highly unlikely in most modern industrial economies. The more likely outcome is some combination of unemployment and underemployment as displaced. Workers seek rent employment or new careers as well as capital stock accumulation. Through replacement of plant and equipment damaged by temporary disinvestment (not necessarily technological obsolescence). As time passes and the economy recovers, it will return to its previous path of economic growth. The extent to which it does so depends on the extent to which resources. Was misallocate during the downturn and how quickly capital replenishes.

The effects of a business cycle can be analyzed from several perspectives:

From the supply side, there are long-term structural factors. Such as natural resources or free trade barriers that could affect potential output. From the demand side, various changes in aggregate expenditures. Such as investment spending by firms or household spending, government spending, or exports/imports could cause fluctuations in national income says Peter Decaprio. This perspective is particularly useful when real shocks happen like oil price increases that push up inflation rates. While limiting production expansion at full utilization of capital and labor force.

There are several leading indicators that could be followed to give some advance information on the state of the economy:

Leading Indicator: Index of consumer expectations –

An indicator “based on data from a monthly survey of households conducted. By The University of Michigan’s Survey Research Center asking consumers. How they expect economic conditions over the next six months to change”. This is one way to examine if people think there will be an expansion or recession.

Leading Indicator: Employment Trends –

This indicator measures “the change in payroll employment. Before it reflects in the Bureau of Labor Statistics (BLS) payroll survey or the household survey. Except for those revisions necessitated by decennial census activities” which essentially means measuring new jobs created.

Leading Indicator: New Orders for Durable Goods –

This indicator is basically measuring the demand side of the economy by looking at “the dollar value of orders placed with domestic producers of goods made to last 3 years or more”. Peter Decaprio says a high number means that production will expand

There are several different methods that can be used to conduct economic analysis, including data-based and theoretical models.

The economic theory seeks to provide a conceptual framework for descriptive and normative analysis. While statistical techniques allow researchers to quantify relationships in a variety of ways. The various tools available in econometrics try to answer specific questions in economics. Such as why certain factors could have a significant impact on the economy. In the present case, we’ll be using a statistical model called Vector Auto-Regression (VAR). Which is use to analyze the dynamics of an economic system. At a given moment in time, such as right now.

Vector Auto Regression:

A regression method is use to find relationships between variables observe sequentially over time and one variable observed at different points in time. This model tries to predict the current values of variables by considering past values and lagged endogenous variables.


Presently, the economy seems to be in a stable state. Which might lead one to believe that it is not ripe for expansion explains Peter Decaprio. However, looking at several indicators like new orders for durable goods and employment trends. Show that there are positive signs that could indicate otherwise. This model will update as information becomes available, so this conclusion can verify.

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