Economic Analysis of the Business Cycle

Business cycles are periods of economic activity characterized by an up cycle and a down cycle. The term “business cycle” was first used by economists John Wise and Thorsten vonship in Their Theory of Business Cycle Dating, published in 1923. They noted that periods of up cycle are characterized by rising prices, falling employment rates, stable or increasing government spending, and low interest rates. Conversely, down cycle is characterized by falling prices, declining employment rate, increasing government spending, and increasing interest rates. The up and down cycle, they noted, tend to recur due to the fact that there is a tendency for growth and expansion in periods of up cycle, but contraction and decline in a down cycle.

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To forecast the ups and downs of the business cycle, various tools are available in the macroeconomic forecasting models. A key concept used in predicting the ups and downs of the business cycle is the employment elasticity of the economy. With respect to the forecast of ups and downs of the economic activity, the level of employment can affect the inflationary or deflationary risks. If the level of employment is high, the inflationary risks are reduced since there is more demand for goods and services, which leads to higher inflation.

Other factors that are considered in the forecasting of business cycle include characteristics of market phase, business cycle phases, and changes in national income structure. Economic analysts use several statistical concepts and instruments to forecast the business cycle and identify the phases of expansion and contraction. The indicators of these phases are: the business cycle indicators BES (benchmark index series), Ucture index, or (also called the enterprise index), and RSI (the Russell index).