what is the trend line in business cycle

• The trend line represents the average position of a cycle.
• It indicates the general direction in which the economy is moving.
• An upward trend suggests that the economy is growing.
• The trend line usually has a positive slope, because production capacity increases over time.
• Diagram showing trend line (see Figure 2.1 on page 26 for an example) .

More items...

Full Answer

What does the growth trend line on a graph of business cycles?

The growth trend line on a graph of business cycles shows the overall trend of increasing economic activity over time. Population growth and the development of capital generate economic growth. This widget is not licensed for .

What is the line through the business cycle called?

The line through the business cycle is known as the trend line. The trend line shows that the economy is always moving upwards or growing in the long run. The trade cycle is used to analyze the state of the economy.

What does the line of Cycle Show?

On the other hand, the line of cycle shows the business cycles that move up and down the steady growth line. The different phases of a business cycle (as shown in Figure-2) are explained below. 1. Expansion: The line of cycle that moves above the steady growth line represents the expansion phase of a business cycle.

What are trendlines in trading?

1 Trendlines indicate the best fit of some data using a single line or curve. 2 A single trendline can be applied to a chart to give a clearer picture of the trend. 3 Trendlines can be applied to the highs and the lows to create a channel. 4 The time period being analyzed and the exact points used to create a trendline vary from trader to trader.

What does the growth trend line represent?

A trend line with a positive slope indicates a positive relationship between the variables. They increase or decrease together. A trend line with a negative slope indicates a negative relationship between the two variables.

What are the 4 cycles of the business cycle?

The four stages of the cycle are expansion, peak, contraction, and trough. Factors such as GDP, interest rates, total employment, and consumer spending, can help determine the current stage of the economic cycle.

What are the 5 phases of the business cycle?

In a business cycle, the economy goes through phases like expansion, peak economic growth, reversal, recession and depression, finally leading to a new cycle.

What are trends and cycles?

The trend provides information on longer-term movements in the seasonally adjusted data series over several years. The cycle is a sequence of smoother fluctuations around the longer-term trend in part characterized by alternating periods of expansion and contraction.

What is business cycle and its phases?

A business cycle is the repetitive economic changes that take place in a country over a period. It is identified through the variations in the GDP along with other macroeconomics indexes. The four phases of the business cycle are expansion, peak, contraction, and trough.

What 4 factors affect the business cycle?

Variables affecting the business cycle include marketing, finances, competition and time.

What are the four stages of growth?

The four stages of growth all businesses go through are:Start-up.Ramp-up/Growth.Expansion/Maintenance.Maturity.

How are business cycles measured?

A common way to measure the business cycle is by using the concept of the deviation or growth cycle. This approach defines the business cycle as cyclical fluctuations in overall economic activity around its long-term trend.

What is a trend cycle component?

The trend-cycle is the component that represents variations of low frequency in a time series, the high frequency fluctuations having been filtered out.

How long is the trend cycle?

In the fashion world, a trend is described as a broad direction in which something is evolving or changing and thus indicates the popularity of a particular sort of style or item of clothing. A micro-fashion trend's cycle typically lasts 3-5 years, but macro-trends often last 5-10 years.

Why are trend cycles so short?

“Trend cycles have got shorter, hugely due to social media. Traditionally, we had the spring/summer, autumn/winter shows – now we've got new collections coming out practically weekly.” The advent of social media came around the same time as Tumblr Twee peaked in popularity.

What are the 4 phases of the business cycle quizlet?

The four phases of the business cycle are peak, recession, trough, and expansion.

What are the four main categories of unemployment?

Key Takeaways Unemployment can be classified as frictional, cyclical, structural, or institutional.

What phase of the business cycle are we in 2021?

The US and other major economies remain in the mid-cycle phase of the business cycle, but an increasing number of indicators suggest that the late cycle when economic growth slows may be approaching.

What is an example of business cycle?

The business cycle since the year 2000 is a classic example. The expansion of activity happened between 2000 and 2007 was followed by the great recession from 2007 to 2009. It started with the easy access to bank loans and mortgages. Since new homebuyers could easily afford loans, they purchased them.

What is the straight line in the middle of the business cycle?

In the diagram above, the straight line in the middle is the steady growth line. The business cycle moves about the line. Below is a more detailed description of each stage in the business cycle:

What are the extreme points of a business cycle?

This completes one full business cycle of boom and contraction. The extreme points are the peak and the trough.

What is the first stage of a business cycle?

The first stage in the business cycle is expansion. In this stage, there is an increase in positive economic indicators such as employment, income, output, wages, profits, demand, and supply of goods and services. Debtors are generally paying their debts on time, the velocity of the money supply is high, and investment is high.

What is the stage of the economy that follows the peak phase?

Recession. The recession is the stage that follows the peak phase. The demand for goods and services starts declining rapidly and steadily in this phase. Producers do not notice the decrease in demand instantly and go on producing, which creates a situation of excess supply in the market. Prices tend to fall.

What is the time period of a boom?

The time period to complete this sequence is called the length of the business cycle. A boom is characterized by a period of rapid economic growth whereas a period of relatively stagnated economic growth is a recession. These are measured in terms of the growth of the real GDP, which is inflation-adjusted.

Do Keynesian models necessarily indicate periodic business cycles?

Keynesian models do not necessarily indicate periodic business cycles but imply cyclical responses to shocks via multipliers. The extent of these fluctuations depends on the levels of investment, for that determines the level of aggregate output.

What is the line through the business cycle?

The line through the business cycle is known as the trend line . The trend line shows that the economy is always moving upwards or growing in the long run. The trade cycle is used to analyze the state of the economy.

What is the business cycle?

Business Cycle Definition. The different phases and fluctuations that an economy goes through over time, such as periods of booms (expansions) and economic recessions (contractions), are collectively known as the business cycle. With these booms and recessions come concurrent increases and decreases in an economy’s production output levels ...

Why is the NBER incapable of assessing each phase of the business cycle right when it starts?

The NBER is incapable of assessing each phase of the business cycle right when it starts, because the data requires some time for analysis. They announce each phase after it has begun. You can review where the US economy is in the business cycle on the National Bureau of Economic Research’s website.

How do central banks prevent economies from undergoing overly rapid expansion?

Central banks prevent economies from undergoing overly rapid expansion with certain strategies of monetary policy: typically raising interest rates and reducing the money supply. And when economies are becoming too stagnant, they will do the reverse: lowering interest rates and raising the money supply. Those economists who blame central banks for the existence of the business cycle argue that by withdrawing the interference by the central banks, the cycle itself can actually become a thing of the past.

How does the business cycle affect the economy?

The business cycle may change due to natural factors, for example, during periods of heavy or unexpected rainfall; agricultural productivity may be affected. A lack of rainfall could result in a shortage of raw material, and therefore, industrial production is also affected. This shortage can affect the whole economy, particularly those that rely on agriculture as their main component of the Gross Domestic Product ( GDP ).

What is the expansion phase of a business cycle?

In the graph above, the curve above the trend line represents the expansion phase of the business cycle. The periods of expansion (economic growth where real output increases) follow a period of recessions. The booms characterize fast economic growth, which tends to be inflationary and unsustainable. During this expansion period employment, investment income, wages, profits, demand, and supply are high. The movement of the money supply is typically continuous and uninterrupted.

How can being savvy about the business cycle benefit investors?

Being savvy about the business cycle can benefit investors enormously. By selecting certain stocks based on the current phase of the business cycle, they can maximize their profits. One example might be purchasing stocks that are cheap in the final phases of the business cycle when the economy is contracting (i.e. by the trough phase, pre-recovery).

What are the phases of a business cycle?

Here we discuss the 5 phases of the business cycle (expansion, peak, recession, depression, recovery) with the help of examples. You can learn more about economics from the following articles –

How many phases are there in a trade cycle?

Thus, a trade cycle consists of the following four phases:

Why do countries keep track of the trade cycle?

A country keeps track of the trade cycle to ensure that the economy is on the path of growth, unemployment steeps down, and the inflation rate remains under control. To understand the economic fluctuations and pattern, let us have a look at the following graph:

What happens after a peak?

After reaching a peak, if things don’t come under control things take a turn to the worse side. Economies reduce in size, companies cut back investments. As a result, people will start losing their jobs and the demand and sales reduce even further.

How Does the Business Cycle Work?

The duration of a business cycle is the period containing one expansion and contraction in sequence. One complete business cycle has four phases: expansion, peak, contraction, and trough. They don’t occur at regular intervals or lengths of time, but they do have recognizable indicators.

What is the duration of a business cycle?

The duration of a business cycle is the period of time containing a single boom and contraction in sequence. The time it takes to complete this sequence is referred to as the length of the business cycle. Each business cycle has four phases: expansion, peak, contraction, and trough. They don’t occur at regular intervals, ...

What is peak in economics?

The peak is the second phase of the cycle. It occurs when all of the expansionary indicators begin to level off. The economy might take weeks or a year to transition into the contraction phase. The GPD growth rate falls below 2% and continues to decline. The peak is displayed on a graph as the highest portion of the curve before moving downward.

Why does the central bank raise rates?

The central bank raises rates to manage an expansion so it doesn't peak. That's contractionary monetary policy. 9. The goal of economic policy is to keep the economy growing at a sustainable rate. It should be strong enough to create jobs for everyone who wants one but slow enough to avoid inflation.

Why is the cycle important?

The cycle is a useful tool for analyzing the economy. It can also help you make better financial decisions. Learn more about what a business cycle is, how a business cycle works, and the four phases that each business cycle has.

What are the factors that affect the business cycle?

Three factors cause each phase of the business cycle: the forces of supply and demand, the availability of capital, and consumer and investor confidence. 3 The most critical is confidence in the future—when consumers and investors have faith in the future and policymakers, the economy tends to expand. It does the opposite when confidence levels drop. 4

How does the government influence the business cycle?

The government monitors the business cycle, and legislators attempt to influence it by implementing tax and spending changes. When the economy is expanding, taxes can be increased, and spending can be decreased. If it is contracting, the government can lower taxes and increase spending. This is called fiscal policy. 3

What are the stages of a business life cycle?

What is the Business Life Cycle? The business life cycle is the progression of a business in phases over time and is most commonly divided into five stages: launch, growth, shake-out, maturity, and decline. The cycle is shown on a graph with the horizontal axis as time and the vertical axis as dollars or various financial metrics.

How do businesses extend their life cycle?

However, it’s important to note that many businesses extend their business life cycle during this phase by reinventing themselves and investing in new technologies and emerging markets. This allows companies to reposition themselves in their dynamic industries and refresh their growth in the marketplace.

What happens to debt financing during sales peak?

However, as sales peak, the debt financing life cycle increases exponentially. Companies prove their successful positioning in the market, exhibiting their ability to repay debt. Business risk continues to decline.

What happens during the growth phase of a company?

During the growth phase, companies start seeing a profit and positive cash flow, which evidences their ability to repay debt.

What is phase 2 of a business cycle?

Phase Two: Growth . In the growth phase, companies experience rapid sales growth. As sales increase rapidly, businesses start seeing profit once they pass the break-even point. However, as the profit cycle still lags behind the sales cycle, the profit level is not as high as sales.

What happens to sales as a corporation approaches maturity?

However, unlike the earlier stages where the business risk cycle was inverse to the sales cycle, business risk moves in correlation with sales to the point where it carries no business risk. Due to the elimination of business risk, the most mature and stable businesses have the easiest access to debt capital.

What happens to cash flow as a business matures?

When the business matures, sales begin to decrease slowly. Profit margins get thinner, while cash flow stays relatively stagnant. As firms approach maturity, major capital spending is largely behind the business, and therefore cash generation is higher than the profit on the income statement.

Definition of a Growth Trend Line

A growth trend line is the overall trend of economic activity showing increases over time.

Detailed Explanation

The growth trend line on a graph of business cycles shows the overall trend of increasing economic activity over time. Population growth and the development of capital generate economic growth.

What Is a Business Cycle?

"Business cycles are a type of fluctuation found in the aggregate economic activity of nations…a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions…this sequence of changes is recurrent but not periodic." That description, from the 1946 magnum opus by Arthur F. Burns and Wesley C. Mitchell, Measuring Business Cycles, remains definitive today. 1 

How does a business cycle recovery work?

On the flip side, a business cycle recovery begins when that recessionary vicious cycle reverses and becomes a virtuous cycle, with rising output triggering job gains, rising incomes, and increasing sales that feed back into a further rise in output. The recovery can persist and result in a sustained economic expansion only if it becomes self-feeding, which is ensured by this domino effect driving the diffusion of the revival across the economy.

What are the three P's and three D's of recession?

These three P's correspond to the three D's of recession. An expansion begins at the trough (or bottom) of a business cycle and continues until the next peak, while a recession starts at that peak and continues until the following trough. The National Bureau of Economic Research (NBER) determines the business cycle chronology—the start ...

How is the severity of a recession measured?

A recession's depth is determined by the magnitude of the peak-to-trough decline in the broad measures of output, employment, income, and sales. Its diffusion is measured by the extent of its spread across economic activities , industries, and geographical regions. Its duration is determined by the time interval between the peak and the trough.

What is recession in economics?

A recession is actually a specific sort of vicious cycle, with cascading declines in output, employment, income, and sales that feed back into a further drop in output, spreading rapidly from industry to industry and region to region.

When does expansion begin?

An expansion begins at the trough (or bottom) of a business cycle and continues until the next peak, while a recession starts at that peak and continues until the following trough.

When did the S&P 500 plunge 20%?

The 20% plunge in the S&P 500 in late 2018 also occurred within the fifth GRC downturn that began in April 2017 and culminated in the 2020 recession. 12 . In essence, the prospect of recession usually, but not always, brings about a major stock price downturn.

What is a business cycle?

Business cycles are characterized by boom in one period and collapse in the subsequent period in the economic activities of a country.

What are the two phases of a business cycle?

There are basically two important phases in a business cycle that are prosperity and depression . The other phases that are expansion, peak, trough and recovery are intermediary phases.

What happens in the trough phase of the economy?

Apart from this, the level of economic output of a country becomes low and unemployment becomes high. In addition, in trough phase, investors do not invest in stock markets. In trough phase, many weak organizations leave industries or rather dissolve. At this point, an economy reaches to the lowest level of shrinking.

What is peak phase?

In other words, peak phase refers to the phase in which the increase in growth rate of business cycle achieves its maximum limit. In peak phase, the economic factors, such as production, profit, sales, and employment, are higher, but do not increase further. In peak phase, there is a gradual decrease in the demand of various products due ...

What happens when the economy reaches the lowest level of shrinking?

Once the economy touches the lowest level, it happens to be the end of negativism and beginning of positivism.

What happens during the expansion phase?

In addition, in the expansion phase, the prices of factor of production and output increases simultaneously. In this phase, debtors are generally in good financial condition to repay their debts; therefore, creditors lend money at higher interest rates. This leads to an increase in the flow of money.

What is the line of growth that moves above the steady growth line?

1. Expansion: The line of cycle that moves above the steady growth line represents the expansion phase of a business cycle. In the expansion phase, there is an increase in various economic factors, such as production, employment, output, wages, profits, demand and supply of products, and sales. In addition, in the expansion phase, the prices ...

Stages of The Business Cycle

Explanations by Economists

• John Keynesexplains the occurrence of business cycles is a result of fluctuations in aggregate demand, which bring the economy to short-term equilibriums that are different from a full-employment equilibrium. Keynesian modelsdo not necessarily indicate periodic business cycles but imply cyclical responses to shocks via multipliers. The extent of th...

See more on corporatefinanceinstitute.com

Additional Resources