Question

1. Draw a Business Cycle, label all parts and explain the characteristics of each phase (stage).

1. Use the following data to answer the question below: Write down all calculations.

Household Consumption         $400b            Rent                                                  $ 12b

Depreciation                                43b             Interests                                              15b

Indirect business taxes                50b              Proprietors’ income                           80b

Government purchases              128b             Employee compensation                  390b              Exports                                          7b             Gross private domestic investment    88b

Imports                                        15b             

1. Use Spending/Expenditure approach to calculate GDP

2. Use Income approach to calculate GDP

c.         Calculate the statistical discrepancy

Answer 1

Part 1

The business cycle means that the increase and decrease of goods and services for an economy over a period of time. It is the main tool for checking the present condition of the economy. It is also considered an economic cycle, which takes into account the change in GDP over the period. The expansion period in the business cycle is termed as the period from a trough to the peak and the contraction is the period from peak to the trough. The period of the business cycle would be termed as the period of rapid expansion to the contraction. The expansion and contraction are generally measured in terms of GDP in the economy. The GDP is the money value of all goods and services produced in an economy. The business cycle is shown in the following figure,

Peak Real GDP Peak Contraction Expansion Expansion Trough Time

Phases of the business cycle.

Generally, there are four phases of the business cycle. That is, expansion, peak, contraction and trough.

Expansion

The expansion is the growing trend of the economy. At this period, the economy has shown an increase in GDP and a decrease in unemployment.

Peak

It is the maximum growth of the economy. In this period, the economy facing a low level of unemployment.

Contraction

It is the period of the economy facing a recession. In this period, the economy facing negative growth of GDP and expansion of unemployment.

Trough

Here the economy falls entirely into recession and facing a high level of unemployment and low GDP growth rate.