Economics as a Science

The Business Cycle

The business cycle or trade cycle is a permanent feature of market economies: gross domestic product (GDP) fluctuates as booms and recessions succeed each other.

During a boom, an economy (or at least part of it) expands to the point where it’s working at full capacity, so that production, employment, prices, profits, investment and interest rates tend to rise.

During a recession, the demand for goods and services declines and the economy begins to work at below its potential. Investment, output, employment, profits, commodity, share prices and interest rates generally fall. A serious, long-lasting recession is called a depression or a slump.

The highest point on the business cycle is called a peak, which is followed by a downturn or a period of contraction. Economists sometimes describe contraction as “negative growth”.

The lowest point on the business cycle is called a trough, which is followed by a recovery or an upturn or a period of expansion.

There are various theories as to the cause of business cycle. Internal (or endogenous) theories consider it to be regular and indefinitely repeating. When economic times are good and people feel good about the future, they spend their money. If people are worried about the possibility of losing their jobs in the near future they tend to save more.

External (or exogenous) theories, on the contrary, look for causes outside economic activity: scientific advances, natural disasters, elections or political shocks, demographic changes, and so on.

Notes:

gross domestic product (GDP) – валовой внутренний продукт (ВВП)

fluctuate – колебаться, быть неустойчивым

recession – спад, снижение

downturn – экономический спад, понижение

upturn – подъём, рост

trough – самый низкий уровень экономической активности, низшая точка (цикла)

endogenous theory – эндогенная (внутренняя) теория

exogenous theory – экзогенная (внешняя) теория

Unit 2