5.

2 CAUSES OF ECONOMIC (BUSINESS) CYCLES

MONETARY CAUSES (ENDOGENOUS)
At the end of a recession phase, the growth in money supply is low.
The demand for credit is weak and interest rates are low.
Banks make their profit by lending out money.
Interest rates are lowered to increase assets (loans) so the money supply
increases.
With increased economic activity, money is borrowed but as interest rates
increase, individuals borrow more money before a further increase in interest
rates can occur.
Interest rates become so high that people/ businesses begin to experience debt
problems.
3
This leads to bankruptcy which in turn leads to a decrease in production, income
and expenditure.
Turning point in the cycle is reached as the demand for credit, money creation
and money supply decrease.
People's standards of living declines and people struggle for survival by
becoming part of the informal sector.
REAL CAUSES (ENDOGENOUS)
Causes related to
Design of new profitable production processes
Discovery and implementation of new technology and machinery
Creation and exploitation of new markets
Discovery of new resources
Upswing phase starts when there is an upswing in the economies of trading
partners.
They spend more, import more and can export more.
Export enterprises can produce more, employ more factors of production.
Increased production needs more intermediate products so production,
employment and investment increase.
Increased employment results in higher income and consumption and all sectors
expand.
New factories start to produce.
Increased supply.
All goods are not sold resulting in bankruptcy.
Increased unemployment follows.
Decline in production and investment.
EXOGENOUS CAUSES
Consumer and Investor Confidence
As people are pessimistic at the beginning of an upswing phase, they don't
borrow, invest or spend and this dampens revival.
Optimism now overcomes pessimism; this leads to an overestimation of ability
and demand for products increase.
Borrow too much money, produce and consume too much.

Undertakings get into financial difficulty.

When this the downturn starts.
As people become pessimistic again, this lengthens and deepens the recession.
Natural disasters e.g. oil platforms in gulf; War; Stock market crash

New Economic Paradigm

Traditional monetarists believed that government should not intervene and that G
only created shocks to the cycle e.g. boom and bus
Keynes promoted fine tuning of economy by G
aimed at smoothing business cycles to prevent the boom bust cycle

Anti-cyclical monetary policy is used

Small increases in rates before the economy overheats help to prevent very high
peaks
0.25 % - quarter % point 25 basis points is used rather than 1 or 2 %

4. FEATURES UNDERPINNING FORECASTING

o Leading indicators: where the economy is headed and occur before the
peak or trough e.g. increase in business start-ups, new business car
sales, share prices, residential building plans
o Lagging indicators: explain where the economy has been. They occur
after a peak or trough e.g. increased investment, hours spent in
construction,
o Coincident: occur at the same time e.g. retail sales, real GDP increase
o Using known values to predict a trend (or the future) is called
extrapolation
o One method of extrapolation is using moving averages
o We use uneven number of years e.g. 3, 5 or 7 year moving average
o Add up the data for 3, 5 or 7 years and divide by the number of years
Year

1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004

Nominal
GDP per
capita
(R)
461
486
533
569
614
676
816
981
1079
1191
1292
1450
1693
2205
2494
2766
3094
3545
4002
4583
5244
6164
7247
8172
9168
10067
11286
12504
13920
15368
16699
17704
18999
21109
22895
25644
27016
29102

Real
GDP per
capita
(R)
19999
20275
20660
21160
21535
21365
21808
22612
22482
22471
21919
22032
22347
23298
23971
23335
22387
23006
22232
21753
21739
22183
22241
21710
21045
20170
19996
20215
20412
20849
20956
20626
20673
21109
21265
21597
21774
22149