According to mainstream thinking, economic slumps are caused by various shocks. This means that these slumps are caused by unexpected events, which by implication are not known beforehand.

Obviously if reasons behind various shocks cannot be established beforehand it makes sense to look at various symptoms of the emerging economic slump. Based on these symptoms the economic doctors could decide on the medicine required either to fix the economy or to prevent it from collapsing into an economic slump.

To be able to ascertain the health of an economy, what is required is to have the necessary information i.e. the data. It is held that by analyzing the data, experts could identify the state of an economy. However, they argue that as it is not always easy to identify the health of the economy just by looking at the data — what is required is to break the data into its key components. This, it is held will enable the economist to identify the key sources of the disease.

Four Components that Drive the Data — According to Mainstream Economics

According to popular thinking the data that is observed over time —labeled as time series — is determined by four components, these are:

1. The trend component

2. The cyclical component

3. The seasonal component

4. The irregular component

It is accepted that the trend determines the general direction of the data over time, while the cyclical component causes movements that are related to the business cycle. The influence of seasons like winter, spring, summer, and autumn and various holidays is conveyed by the seasonal component. The irregular component depicts the various irregular events. It is held that the interplay of these four components generates the final data.

Popular thinking regards the cyclical component as the most important part of the data. It is held that the isolation of this component would enable the analysts to unravel the mystery of the business cycle. Moreover, to preempt the negative effect of the business cycle on people’s well-being it is important to observe the magnitude of the cyclical component on as short a duration basis as possible. Like any disease, the earlier it is detected the better are the chances of combating the disease. Thus, once the central bank has identified the magnitude of the cyclical component it could offset its influence by means of a suitable monetary policy.