EDUCATION
FOREX EDUCATION: Everything You Need To Know About Forex Trading
Exchange rates respond directly to all sorts of events, both tangible and psychological.
Business cycle
The business cycle represents the overall recurring and fluctuating levels of economic activity as measured by the levels of employment, prices, and production over a period of time. The four stages of the business cycle are growth (expansion), peak, recession (contraction), and trough.
In general, the business cycle is said to go through expansion, then the peak, followed by recession, and then it finally bottoms out with the trough before repeating the same cycle once again.
Growth
This is a period of economic growth. Also known as boom, this is a period of time during which sales or business activity increases rapidly. This the one phase of the business cycle when the economy moves from a trough to a peak.
During expansion:
• Output is high due to increased demand
• Prices tend to increase due to extra demand
• Businesses produce more goods
• Businesses invest in more machineries
• Unemployment is low
• Consumers confidence is high encouraging consumer to spend more money
• Business confidence is high which leads to an increase in investment
• Less money is spent by the government on unemployment benefits
• More money is collected by the government in income tax and VAT
Peak
The peak is highest point that an economy can experience at the end of an economic expansion or when the economy is about to start contraction. The changeover from expansion to contraction is called peak. Business activity surges and gross domestic product expands until it reaches a peak.
Recession
Also known as slum, this is the period where economic growth starts to slow down after reaching the highest level possible. This the one phase of the business cycle when the economy moves from a peak to a trough. A particularly severe recession is known as a depression.
During recession:
• Output slows down due to a reduction in demand
• Businesses cut back on production
• Confidence may begin to suffer so consumers may choose to save rather than spend
• Individuals may lose their jobs so unemployment is likely to increase
• Firms may lose confidence and reduce investment
• Some businesses may go bankrupt
• More money is spent by the government on unemployment benefits
• Less money is collected by the government in income tax and VAT
• MPrices start to fall
Trough
The trough is the lowest or the worst situation that an economy can experience after a slump. This stage of the economy's business cycle marks the end of a period of declining business activity and the transition from contraction to expansion.
Other determinants of Foreign Exchange Rate
• Political developments
• New tax laws
• Stock market news
• Inflationary expectations
• Interest rate differentials
• International investment patterns
• Government and central bank monetary policies among others
• Less money is collected by the government in income tax and VAT
• MPrices start to fall
