Welcome back. We're going to cover the business cycle. So the business cycle in developed countries, we can generally see a pattern of growth followed by periods of slower growth, even falling growth. So you're going to go through periods of expansion, and you're going to go through periods of contraction, and it's the natural evolution of the business cycle. You're going to go up and down based on market conditions. This is known as the business cycle, right? The business cycle is the periodic fluctuations and economic activity measured by changes in real GDP. GDP is gross Dominic gross domestic product. So gross domestic product measures all of the economic output in one country's economy, right? So as there's changes in GDP, if there's not growth, and GDP goes down in one year, and obviously we are considered into a recession. So we want to continue to have GDP GDP growth year over year, so that we can continue an expansionary phase. But then sometimes we may hit economic headwinds that may cause us to contract in the economy, and therefore will be called having been in a recession, the phases of the business cycle are known as peak contraction, trough and expansion, while fluctuations in practice are highly irregular. The most common illustration of the business cycle shows a standard periodic cycle looking something like this. So as you can see, you'll begin here with GDP set at zero. And as you can see, the long term growth trend by the dotted line is moving up. The red line will show us our actual economic GDP and how it's being measured over time. Now you can see, in the beginning, we go through a start up phase, and as we make our initial investment and we are going through getting the operations ramped up, we're going to see a negative economic output, because we're probably borrowing a lot of cash to get our businesses ramped up, where our initial investments are high, and we don't have any return yet on those inputs, but as our business matures, we'll continue to recover, right? And as you can see by the dotted line, we have a convergence between the growth trend line and the long term growth trend line. Once it once it converges and it breaks through the convergence line, you can see that now we're in the recovery phase, and we are more than likely better than break even at this point, and we have recovered our initial investments. We may have been able to pay down our debt through this recovery process, and once our products become into maturity, right, we finally reach pinnacle, boom point, right? So now we are optimizing our profit potential where marginal revenues equal marginal cost, and we are taking this cash, and we're divvying it out to shareholders, reinvesting back into the company, research and developing new projects. Now, over time, you're bound to see some economic headwinds, some government headwinds. You're bound to see something happen in the economy on the long term basis that's going to drive us down into a trough known as a recession. So we're back down below the trend line as we converge, and then we've diverged from it lower, creating a trough. Now we have contracted right we've had, we've had economic contraction a lot of times. This happens because of raising raise interest rates, or higher interest rates at the Federal Reserve which pushes treasury bills higher, which then pushes corporate debt higher, which then pushes commercial bank loans higher. So as we raise interest rates over time, you're going to get this pressure getting put on our growth. And a lot of times when we get interest rates too high, that may cause a recession and pull us down as lending kind of freezes. So as the Federal Reserve will come back through and they'll correct their monetary policy, and then they'll fuel economic growth from interest rates potentially, which will put us back into the convergence to the growth line, long term, as we come out of the growth as we converge and come through the long term growth trend. Now we are back to optimization, coming back through. But you'll also notice at the end of the at the end of the growth cycle, a lot of times, you'll see that after we've contracted, once we come out, a lot of times, as our companies come to maturity, they'll have a long term sell off, down to liquidation. So let's review this again, expansion. Unemployment falls, right? So unemployment falls because companies are hiring, they're expanding, they're growing right as we come through to point D, actual GDP is greater than potential GDP. There is an output gap. Unemployment is less than natural rate of unemployment. So here we're still in our growth phase. Right now we're going to contract unemployment increases, because people are going to start laying off employees and start consolidating down their business as their profitability and their revenues fall, their costs go up. They want to control those costs so that they can continue revenue growth and profit growth. So as we see we come through now at E here, we'll see that actual GDP is less than potential GDP. There is an output gap. Unemployment is greater than natural rate of employment, obviously, in this trough, so you're going to have a higher unemployment rate. You're going to have more benefits through the government, to our labor pool, and then as the company, as the economy, continues to recover, over time, you'll see an expansion back towards positive GDP, back towards positive GDP growth, long term growth trend, or the potential GDP, is equal to full employment at the dotted line at C, and unemployment equals a natural rate of unemployment. So this is the business cycle on a in a nutshell, right? There's going to be booms and busts, periods inside contractions and expansions inside the business cycle. So as we plan, as we organize, as we develop our processes and our goals and objectives for our organizations, we need to keep in mind the business cycle, no long term growth trends and forecasts, especially in the industry that we're competing in, so that we can be competitive moving forward inside the market, 



Last modified: Thursday, February 6, 2025, 7:32 AM