MACROECONOMICS Start

ECONOMIC FLUCTUATIONS:

THE BUSINESS CYCLE

JHONNY GARCIA ROSE ANN CORTIGUERRA

 MACROECONOMICS
CONTENTS 02

• THE BUSINESS CYCLE

• PHASES OF THE BUSINESS CYCLE
• INVESTMENT AND THE BUSINESS CYCLE
• THE COSTS OF BUSINESS CYCLE
• THE GDP OF THE PHILIPPINES
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THE BUSINESS CYCLE 03

• In most developed country economies we can

generally see pattern where there are periods of
rising growth, followed by periods of slowing
growth and even fallen growth.
• This is known as the business cycle or trade
cycle.
• The business cycle is the periodic fluctuations
in economic activity measured by chances in
real GDP.
MACROECONOMICS PHASES OF THE BUSINESS 04
CYCLE

BOOM/ PEAK

RECESSION
TROUGH

RECOVERY
MACROECONOMICS
Business Cycle 05
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BOOM/ PEAK 06

• GDP will reach its highest level at the peak of

the cycle...But problem soon emerge...
• Capacity constraints in the economy are
likely to slow down further increases in
GDP and lead to inflationary pressures.
• Demand for money investments is likely to
increase interests rates.
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RECESSION 07

• The boom period results in higher inflation and

higher interests rates, which ultimately leads to a
fall in consumption and investment.
• This is beginning of the recession phase of the
cycle.
What is the technical definition of a recession?
• A recession is defined as two consecutive quarters
of negative GDP growth, not just a decline in GDP
growth. In other words, GDP growth goes
backwards.
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THE CONDITIONS OF 08

RECESSION
• During a recession, consumption and investment falls.
• Falling aggregate demand will lead to firms to lay off workers, so
unemployment.
• If more people are unemployed, then there will be even less
consumption.
• Low levels of demand result lower rates of inflation, or even
deflation.
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TROUGH 09

• At some point the contraction and recession will come to

an end.
• This is known as the trough.
• Output cannot continue to fall for ever, as there will
always be some people with jobs to maintain a given
level of consumptions will continue to spend by running
budget deficits and people will be able to use savings to
finance consumption.
• Additionally, the low demand for money for investment
will result in lower interest rates.
• Thus, aggregate demand will pick up, the economy will
enter the recovery phase and the cycle will pick up.
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RECOVERY 10

• In the recovery phase, there is increased

aggregate demand and an economic expansion.
• Consumption and investment rise, resulting in
higher level of GDP.
• To meet increased aggregate demand, firms,
take on more workers so that unemployment
falls.
• The newly employed workers spend their new
incomes on durable goods and the process
repeat itself.
 MACROECONOMICS Investment and the Business Cycle 11

One prominent factor is the volatility of fixed investment or inventory

investment expenditures (called the investment cycle) , which are themselves
function a business expectations about future demand. At the top of the cycle,
incomes begin to level off and investment in new supply capacity finally
catches up with demand. This causes the reduction in induced investment and,
via contracting multiplier effects, leads to a fall in national income which
reduces investment even further. At the bottom of the recession, investment
may rise exogenously (due for instance, to the introduction of new
technologies) or through the revival of replacement investment. In this case
the increase in investment spending will, via expansionary multiplier effects,
lead to an increase in national income and a greater volume of induced
investment.
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Cost of the Business Cycle 12

Business cycles are important to study because they entail genuine

economy costs. When the economy goes down into a recession or
depression, production of goods and services falls, causing living
standards to fall. However, rapid increase in production during the
recovery stage of the business cycle will counteract these reductions
in living standards.
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Cost of the Business Cycle 13

An economic downturn usually results in

unemployment of economic resources of all types,
such as labor and capital resources. Plants are
closed down, farmland may lie idle, and workers
with all types of labor skills remain out of work.
Although all of the idle resources may become
employed when the economy recovers, the lost
production cannot be regained. Production that is
lost due to idle resources is production that is
foregone forever.
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Cost of the Business Cycle 14

Business cycles reduce living standards by depleting the capital stock.

At any point in time, a society's ability to produce goods and services
depends on the size of the capital stock. During an economic recession
or depression, existing capital continues to depreciate, which lowers
the capital stock. In a normal business environment, firms have an
incentive to replace and even add to the depreciating plant and
equipment, but in a recession, firms are less likely to replace
depreciating capital. Business downturns tend to erode the stock of
productive capital and reduce future production ability due to the low
sales of goods and services. This is because firms have idle capital and
little incentive to replace equipment that becomes worn out or obsolete.
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Cost of the Business Cycle 15

It is difficult to predict how a downturn in the business cycle will

affect the stock of human capital. In a recession, individuals have
conflicting incentives to invest in human capital, such as education
or on-the-job training. However, unemployed persons may choose
to invest in education or training due to the low opportunity cost of
their time. If individuals consider their current level of training and
skills inadequate, schooling may be a hope for a better life.
The government can step in to prevent the economy from going into
a recession or depression, particularly by preventing the stock of
human capital from declining. This is necessary due to the costs of
business cycles.
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Cost of the Business Cycle 16

Business cycles have a number of economic

disadvantages, such as high unemployment and
inflation. During economic booms, demand for
goods and services grows rapidly, leading to
bottlenecks in the production process. This
causes wages and prices to be bid up, leading to
inflation. Rapid economic growth often frustrates
the economy's ability to quickly match
unemployed workers with job openings.
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GDP OF THE PHILIPPINES 17

The GDP of the Philippines has increased

significantly during the period 1990-2008,
Gross Domestic Product, Q1 1990 to Q1 2008 Growth Rates
with the service sector contributing an average
of 45.33 percent to total GDP. The
manufacturing sector contributed an average
of 34.23 percent and the agriculture sector had
20.44 percent. During the nine-year period,
there were upswings and downswings in the
total production of the economy, with the
service sector contributing an average of
45.33 percent and the manufacturing sector
contributing an average of 34.23 percent.
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GDP OF THE PHILIPPINES 18

The managing director at the Asian

Gross Domestic Product, Q1 1991 to Q1 2012 Growth Rates
Development Bank, Rajat Nag, stated in a
televised interview with the BBC news,
Philippines future looks bright, that the
economists are projecting a GDP growth of
6% in 2013 and 5.9 % in 2014. These
numbers come in line with the recent growth
that the Philippines had in the last 10 years.
The GDP growth of Philippines for 2012 was
6.6% and
Philippines had an average GDP growth rate
of 5.06 (%) in the last 10 years from (2002 to
2012).
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GDP OF THE PHILIPPINES 19

GDP in Philippines is expected to reach 414.19 USD

Billion by the end of 2023, according to Trading
Economics global macro models and analysts expectations. Gross Domestic Product, 2O13 to Q1 2022 Growth Rates
In the long-term, the Philippines GDP is projected to trend
around 439.04 USD Billion in 2024 and 464.94 USD
Billion in 2025, according to our econometric models.

To summary, the Gross Domestic Product (GDP) in

Philippines was worth 394.09 billion US dollars in 2021.
In the long-term, the Philippines GDP is projected to trend
around 379.00 USD Billion in 2022, according to our
econometric models. In the long-term, the Philippines
GDP is projected to trend around 379.00 USD Billion in
2022, according to our econometric models.according to
official data from the World Bank. The GDP value of
Philippines represents 0.18 percent of the world economy.
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THANK YOU

JHONNY GARCIA ROSE ANN CORTIGUERRA