Cyclical fluctuation

economic-dictionary

Cyclical fluctuation is the oscillation that a variable registers (particularly in economics, it is analyzed in gross domestic product or GDP) around a longer-term trend.

In other words, cyclical fluctuations are movements that correspond to a medium-term expansion or contraction, being a phenomenon that is neither seasonal nor accidental.

It is possible to estimate, on average, how long a cyclical fluctuation lasts. For example, it is often said that business cycles last about 5 years. However, this is not always exactly true as it depends on many factors.

It is worth clarifying that cyclical fluctuation is synonymous with the economic cycle, a subject on which we have an article where we detail more information such as the phases of the cycles and their classification based on their duration.

Cyclical fluctuation example

Let's look at an example of cyclical fluctuation. Suppose that a country Z grew (its GDP) 4% in 2018. Similarly, the previous year and the previous year the annual increases were 3% and 3.4%, respectively. This means that the country may be in an expansion phase, taking into account that in the last ten years the growth rate was 2% per year on average.

Within the year 2018, in addition, country Z had greater economic activity during the last quarter, compared to the other quarters. But this is not a cyclical fluctuation, but a seasonal movement.

Similarly, if an unforeseen event occurs, for example, in the political sphere, which generates an impact on economic variables, it is not a cyclical fluctuation, but rather an irregular movement or stochastic process.

Importance of cyclical fluctuations

For the authorities that define economic policies, it is important to identify cyclical fluctuations. That way, they can decide what action to take.

For example, if the country is going through a cyclical fluctuation of lower economic growth, expansionary fiscal or monetary policies can be carried out (such as an increase in public spending or a reduction in the reference interest rate), so that the effects are countercyclical.

Expansive fiscal policy Expansive monetary policy

Measurement of cyclical fluctuations

Cyclical fluctuations are measured by calculating the difference or gap between the economy's effective GDP and its potential GDP, which is that which can be achieved without generating pressures or imbalances on prices and / or wages.

The potential GDP, although it is a theoretical indicator, can be estimated through the Hodrick-Prescott filter that separates the cyclical and trend (long-term) component of a series. This procedure can be carried out through specialized software where the data subject to analysis is entered.

Tags:  accounting Spain Business 

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