Resource use through BC

msk2222's version from 2018-01-21 21:22

Section 1

Question Answer
When a downturn starts,aggregate demand decreases, and as a result, inventories may start to accumulate. Companies may slow production and have equipment that is being used at less than full capacity. Subsequently, companies are likely to stop ordering new inventories and new production equipment.
emporary economic slowdownretaining workers that are not being fully utilized may be a better alternative than firing workers and replacing them later. Finding and training new workers is costly and it may be more cost efficient to keep workers on the payroll, even if they are not fully utilized, while waiting out a short period of slow business. Second, some economists suggest that there is an implicit bond of loyalty between a company and its workers, and thus workers will be more productive if they know that the company is not disposing of them at the first sign of economic trouble.
If the downturn becomes more severecompanies will start reducing costs more aggressively, cutting all non-essential costs. This step often means terminating consultants, workers beyond the strict minimum, standing supply orders, advertising campaigns, and so on. Capacity utilization will be low, and few companies will invest in new equipment and structures. Companies will try to liquidate their inventories of unsold products. In addition, banks will be reluctant to lend because bankruptcy risks are perceived to be higher. As a result, the economy enters what seems to be a downward spiral.
indicator of slack resourcesThe gap between the recession output (GDPR) and the potential output (GDPP), the level of real GDP that could be achieved if all resources were fully utilized,
Decreases in aggregate demanddepress wages or wage growth as well as prices of inputs and capital goods. After a while, all of these input prices will be relatively very low. In addition, the monetary authority may cut interest rates to try to revive the economy.
prices and interest rates decreaseconsumers and companies may begin to purchase more and aggregate demand may begin to rise. Companies may increase production as a result of increased demand and low levels of inventory of finished products. Also, because interest rates have fallen, some companies and households may decide to start investing in structures, housing, and durable goods (equipment for companies, appliances for households). This stage is the turning point of the business cycle; aggregate demand starts to increase and economic activity increases.
economic activity increases,companies are unlikely to immediately start the costly process of selecting and hiring new workers. They may wait for the expansion to give clear signs of life. However, if enough new investment triggers an increase in aggregate demand, companies will start replenishing their inventories of finished products. This replenishment will increase the demand for intermediate products, which will further increase aggregate demand.
boom phase,the economy may experience shortages and the demand for factors of production may exceed supply. It is possible that the excess demand is triggered by overly optimistic expectations of demand for products, which means that the supply of physical capital and production capacity may exceed the demand for products in the future.

Section 2

Question Answer
early stage of a contraction,(2.1)the downturn in spending on equipment usually occurs abruptly as demand for companies’ products starts to decrease. Businesses, seeing a decline in sales and expecting a drop in profits and free cash flow, will halt new ordering and may even cancel existing orders because there is no perceived need to expand production capacity. The initial cuts typically occur in orders for technology and light equipment because there are shorter lead times from order to delivery and managers may simply not place any additional orders. It often takes longer to cancel or halt construction activity or the installation of larger, more complex pieces of equipment, and cutbacks in these areas unfold with a longer lag. Typically, the initial cutbacks at this stage exaggerate the economy’s contraction. Then later, as the general cyclical downturn matures, cutbacks in spending on structures and heavy equipment further intensify the contraction.
early stages of an expansion(2.1)when the economy begins its recovery, sales are still at such low levels that a business is likely to have excess productive capacity and has little need to expand it. But although capacity utilization remains low, capital spending may begin to increase. There are two primary reasons underlying the increase in capital spending. One, growth in earnings and free cash flow attributable to the economic improvement gives businesses the financial ability to increase spending. Two, the upturn in sales may convince managers to reinstate some orders that had been canceled. Typically, the orders initially reinstated are for equipment with a high rate of obsolescence, such as software, systems, and technological hardware. This type of equipment is likely to enhance efficiency more than expand capacity; enhancing efficiency may be the initial focus of new orders. An increase in new orders for equipment to enhance efficiency often provides the first signal of recovery. Because orders precede actual shipments and possibly payments, an emphasized and widely watched indicator of the future direction of capital spending is orders for capital equipment.
later stage of expansion,(2.1)productive capacity may begin to limit ability to respond to demand. Orders and sales at this stage focus on capacity expansion and increasingly are for heavy and complex equipment, warehouses, and factories. Spending on new capacity may begin before capacity seems to need additions. This seeming disconnect occurs because there can be a long lag between order and delivery or completion of heavy and complex equipment, warehouses, factories, and so on. Also, because economies are always changing their needs, physical capital that counts as capacity in the statistics may be less relevant to current production needs even though the underlying assets remain fully serviceable
Fluctuation in Inventory Levels-key indicatoris the inventory–sales ratio that measures the inventories available for sale to the level of sales
peak of the economic cycle,-stage 1as sales fall or slow, businesses may lag in cutting back on new production and inventories increase. The lower sales combined with higher inventories result in an increase in inventory–sales ratios. This apparent increase in inventories may hide signs of a weakening economy. Practitioners (investment analysts and others) look for measures that focus on what are commonly called “final sales,” which exclude the effects of inventory changes. To adjust and sell off these unwanted inventories, a business may cut production below even the reduced sales levels. This cut in production causes subsequent indicators in the overall economy to look weaker than they otherwise might have been. Although final sales offer a reality check, the production cutbacks involved in reducing inventory levels may lead to order cancellations and layoffs by producers that may subsequently cut final sales further and deepen cyclical corrections.
businesses producing at rates below the sales volumes necessary to dispose of unwanted inventories, inventory–sales ratios begin to fall back toward normal-stage 2When these indicators return to acceptable levels and businesses no longer have any need to further reduce inventories, they will raise production levels. The increase in production results in a seemingly improved economic situation, even if sales remain depressed. Again, final sales may provide a more realistic picture of the underlying economic situation. At this phase in the cycle, the seemingly minor increase in production levels can actually mark the beginning of the cyclical turn because layoffs may slow or stop and demand for other inputs may also increase.
sales begin their cyclical upturn,-stage 3a business may initially fail to keep production on pace with sales, which causes it to lose inventory to the initial sales increase. The subsequent fall in inventory–sales ratios, when it occurs in the face of rising sales, quickly prompts a surge in production not only to catch up with sales but also to replenish depleted inventories. However, sometimes during short or severe recessions, when businesses have not had time to adjust or reduce inventories to acceptable levels, companies may initially consider increased production unnecessary. As a result, the lag between increased sales and production may be longer than in other cycles. But whether the production upturn occurs with a short or a long lag, it typically marks a turn in hiring patterns and for a time can markedly exaggerate the cyclical strength.

Section 3

Question Answer
Two primary measures of household consumptionretail sales and a broad-based indicator of consumer spending that also includes purchases outside purely retail establishments, such as utilities, household services, and so on. Often these measures are presented in nominal terms and deflated to indicate directions of real or unit purchases and growth
three major divisions-consumer good(1) durable goods, such as autos, appliances, and furniture; (2) non-durable goods, such as food, medicine, cosmetics, and clothing; and (3) services, such as medical treatment, entertainment, communications, and personal services.
how practitioners can also gauge future directions by analyzing measures of consumer confidence or sentiment to ascertain how aggressive consumers may be in their spending.
Cross-border comparisons of saving rates are difficultbecause saving rates are calculated in different ways in different countries and sometimes in different ways within the same country.
changes in saving ratescapture consumers’ intent to reduce spending out of current income. The saving rate may also reflect future income uncertainties perceived by consumers (precautionary savings). Therefore, a higher saving rate may indicate consumers’ ability to spend despite possible lower income in the future
Housing Sector BehaviorBecause many home buyers finance their purchase with a mortgage, the sector is especially sensitive to interest rates. Home buying and consequently construction activity expand in response to lower mortgage rates and contract in response to higher mortgage rates.
Housing Sector Behavior-internal cycleWhen housing prices are low relative to average incomes, and especially when mortgage rates are also low, the cost of owning a house falls and demand for housing increases. Often indicators of the cost of owning a house are available to compare household incomes with the cost of supporting an average house, both its price and the expense of a typical mortgage. Commonly, housing prices and mortgage rates rise disproportionately as expansionary cycles mature, bringing on an increase in relative housing costs, even as household incomes rise. The resulting slowdown of house sales can lead to a cyclical downturn first in buying and then, as the inventory of unsold houses builds, in actual construction activity.
External Trade Sector BehaviorWith the rise in external trade, the business cycles of the large economies in the world can be more easily transmitted to other economies.
importsimports rise, all else equal, with the pace of domestic GDP growth, as needs and wants or generally rising demand also increase purchases of goods and services from abroad. Thus, imports respond to the domestic cycle
exportsExports are more dependent on cycles in the rest of the world. If these external cycles are strong, all else equal, exports will grow even if the domestic economy should experience a decline in growth. To understand the impact of exports, financial analysts need to understand the strength of the major trading partners of the economy under consideration.
net difference between exports and imports(they use the balance of payments, which calculates trade’s contribution to the economy as exports less imports).
Currency also has an independent effect that can move trade in directions strikingly different from the domestic economic cycleWhen a nation’s currency appreciates (the currency gains in strength relative to other currencies), foreign goods seem cheaper than domestic goods to the domestic population, prompting, all else equal, a relative rise in imports. At the same time, such currency appreciation makes that nation’s exports more expensive in global markets and may reduce exports. Of course, currency depreciation has the opposite effect. Although currency moves may be volatile and on occasion extreme, they only have a significant effect on trade and the balance of payments when they cumulate in a single direction for some time. Moves from one month or quarter to the next, however great, have a minimal effect until they persist. Thus cumulative currency movements that take place over a period of years will have an impact on trade flows that will persist even if the currency subsequently moves in the opposite direction for a temporary period.