Some factors are considered external causes of business cycles because they take place outside the economic system. To learn what they are, read on.

Political changes
A change in the political party in power can cause changes in economic activities. For example, with the election of officials who support business interests, the economic activities of the nation usually expand.

Climatic changes
Climatic changes can impact economic activities, especially agriculture and construction. Droughts, floods, and blizzards can affect many economic activities.

International relations
The interaction of our nation with other countries can expand or contract economic activities. For instance, a war or international conflict may increase production of defense materials. This expands our economic activities. However, after the war or conflict ends, the production of these items decreases, and economic activities contract.

Discoveries and innovation
The discovery and/or development of new products, techniques, and resources often stimulates our economy. Imagine how much our economy has benefited from such technological advances as the Internet, computers, and mobile devices! To create and improve these products, large sums of money must be invested. Furthermore, their development creates new jobs.

Psychological changes
People’s psychological—emotional—reactions to life-altering national or international events can also expand or contract economic activities. Consider the horrific events of September 11, 2001, when terrorists hijacked multiple airplanes to carry out an attack on America at New York City’s World Trade Center and the Pentagon building in Washington, D.C. Life, as well as the economy, seemed to come to a standstill. In the months following September 11, consumers drastically cut back on their spending, which caused businesses to reduce their spending and production as well. As a result, the economy—already in decline—slipped into a long recession.