Economic Cycles

The Two Main Economic Cycles

 

What are Economic Cycles in General?

Economic cycles are the time periods of economic fluctuations between growth (economic expansion) and recession (economic contraction).

What Defines the Duration of each Cycle?

The starting and the ending of each economic cycle (Growth and Recession) are determined and measured by macroeconomic factors such as the course of GDP (Gross Domestic Product), the course of National Income & Consumption and the Level of Employment, in an economy.

 

How Central Bank get Involved with the Duration of each Economic Cycle?

Central Banks are able to control the money flows of an economy by using mainly as a tool for the Level of Interest Rates. Of course, central banks can use additional tools such as the Printing of New Money or the Devaluation of the National Currency.

“The game between Growth and Recession can be seen also like the game between Inflation and Unemployment”

i) Growth Cycle: Dealing with Inflation

At periods when the economy is growing too fast, the central bank has to deal with inflation. As inflationary concerns grow, the central bank increase the level of interest rates and thus money supply is reduced. As money supply is reduced, consumption and inflation are both reduced. This is a sign that the growth cycle is coming to an end.

ii) Recession Cycle: Dealing with Unemployment

At periods when recession strikes an economy, the central bank has to deal with unemployment and thus aim to increase the money supply and the consumer spending in an economy. This can be done mainly via the reduction of the level of interest rates. As money becomes cheaper, investment and consumption become easier and that means the start of a new growth cycle.

Graph: The two main Economic Crisis in the US during the past 100 years and how the US Central Bank (FED) has reacted

Financial Ratios

There are hundreds of Financial Ratios. Financial ratios are divided into 5 major categories:

i) Profitability ratios | ii) Cash flow ratios | iii) Efficiency Ratios | iv) Value ratios | v) Leverage Ratios

 

I) Profitability ratios

Profitability Ratios indicate how effective a company is operating in terms of generating profits. Profitability Ratios are divided into Margin and Return Ratios.

Important Profitability Ratios:

1) Cash return on capital invested

2) Contribution margin

3) EBIT and EBITDA

4) EBITDA margin

5) Gross margin

6) Net margin

7) Operating income margin

8) Return on capital employed

9) Return on debt

10) Return on equity

11) Return on invested capital

12) Return on investment

13) Return on net assets

14) Return on total assets

15) Return on total capital