MEP - Business Cycles and Circular Flow (Lesson)

Business Cycles and Circular Flow Microlesson

Introduction

The Great Depression spanned from 1929 through the 1930’s. Classical economists believed that markets were self-correcting, but this didn’t seem to be working. Keynes introduced modern macroeconomic ideas and developed a role for the government in fine tuning the economy. Since then another Great Depression has been avoided but periods of stagflation (stagnant economy, and high inflation which is bad) have occurred.

So how does the great depression relate to the current economy?

People felt good about the economy and invested. Investments cause people to have more money, and feel better about the economy so these actions continued. Eventually the fundamentals caught up with the speculators and the bubble burst. These ideas are partly responsible for the slumps in 1929, 1999 (internet bubble) and 2009 (housing and financial crisis).

 

 

Up, Down and Around

The economy goes through many ups and downs - we use the business cycle and circular flow models to help predict and manipulate the economy. 

Business Cycles

From a conceptual perspective, the business cycle is the upward and downward movements of levels of GDP (gross domestic product) and refers to the period of expansions and contractions in the level of economic activities (business fluctuations) around a long-term growth trend.

Watch the video below to learn more about the business cycle.

 

 

Circular Flow

Model of the circular flow of income and expenditure. The circular flow of income is a model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents.

Watch the video below to learn more about the circular flow.

 

 

Controlling the Economy?

The presentation below will cover the who or what is in control of the economy. 

 

Phases of the Business Cycle

Use the tabbed activity below to review the phases of the business cycle.

Business Cycle Fluctuations

Business cycle fluctuations occur around a long-term growth trend and are usually measured by considering the growth rate of real gross domestic product.

In the United States, it is generally accepted that the National Bureau of Economic Research (NBER) is the final arbiter of the dates of the peaks and troughs of the business cycle. An expansion is the period from a trough to a peak, and a recession is the period from a peak to a trough. The NBER identifies a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production." This is significantly different from the commonly cited definition of a recession being signaled by two consecutive quarters of decline in real GDP.

Watch the video below to learn more.

 

 

Circular Flow

 

In economics, a circular flow model is a diagram that is used to represent the monetary transactions in an economy. There are two flows present within the model including flows of physical things (goods or labor) and flows of money (what pays for physical things). A circular flow model depicts the inner workings of a market system and specific portions of the economy.

The basic circular flow model consists of two sectors that determine income, expenditure, and output. A state of equilibrium is reached when there is no tendency for the levels of income (Y), expenditure (E), and output (OO) to change (Y=E=O).

Watch the video below to learn more.

 

 

 

Review

Review what you have learned by completing the activity below.

 

In Summary . . .

Macroeconomics uses aggregate behavior, the behavior of all households and firms put together.

In general, Microeconomists look at the market and conclude that markets do well. This is because prices are allowed to change pretty easily in individuals markets, so reaching equilibrium is almost a certainty. However in macroeconomics prices and wages can be “sticky”. This means that they do not

change easily, and other outcomes besides equilibrium are possible in the short run (which is what matters right?).

 

 

IMAGES CREATED BY GAVS