The
theory of the
Business Cycle states that
national output, or
GDP (
Gross Domestic Product), does not grow smoothly at its expected trend rate. Rather, it fluctuates irregularly around its trend, showing recurring patterns from trough, through upturn, to peak and then from peak, through downturn and back to the trough. The
cyclic movements themselves are not regular in
timing or in
size.
There are several policies related to the business cycle. Stabilization Policies are aimed at smoothing out the business cycles fluctuations, whilst Structural Policies are aimed at raising the growth trend. This distinction can also be applied to inflation and unemployment, both of which posses cyclical and structural facets.
The variations in the economy brought about by the business cycle are as a result of 4 combined influences:
The economic trend itself,
The Cyclical fluctuations around the trend,
Various Seasonal variations and
Irregular variations.
Each of these components is studied by simply eliminating the others from the scope of the analysis.
Many methods have been developed specifically for this purpose, largely by the NBER, the National Bureau of Economic Research.
There are also many ways in which the turns in market activity can be dated.
The Composite Series method, the Cluster of Turning Points method and the Diffusion Indices.
Each one of the aforementioned methods has within itself, numerous variations and adaptations, dependant upon the market in which it is applied.
The time series that evolve from this analysis are used as leading indicators of the fluctuations in the economy as a whole. Such composite indicators are published in quarterly form by most national reserve banks.
South African Leading Indicators: (as published by the South African Reserve Bank.)
Net gold and other foreign reserves
Building plans passed
Physical volume of mining production
Net new companies registered