The Business Cycle: The Business Cycle Aswathy Aravind PowerPoint Presentation: This tendency of economic activities to expand and contract in periodical interventions is known as trade cycle. Business cycle is the periodic up and down movements in economic activities. Economic activities measured in terms of production, employment and income move in a cyclical manner over a period of time. Cyclical movement is characterized by alternative waves of expansion & contraction, and is associated with alternate periods of prosperity & depression PowerPoint Presentation: “The business cycle in the general sense may be defined as an alternation of periods of prosperity and depression of goods and service.” - Harberler Pattern of the Business Cycle The pattern of that of a period of growth, called expansion, which hits a peak. The growth is followed by a fall in the economy, called a contraction. The bottom of the fall is called the trough. Business Cycle: Business Cycle Prosperity- highest period of economic growth Recession- economic slowdown Depression- prolonged recession Recovery- renewed economic growth Phases of a trade cycle: Phases of a trade cycle Boom / Prosperity/expansion Recession/contraction Depression Recovery Business Cycle: Business Cycle recovery depression Boom: Boom The business outlook is extremely optimistic. The important features of prosperity are: a high level of output ,trade, employment and income, a high level of effective demand and high marginal efficiency of capital, a large expansion of bank credit, and a rising trend in prices, profits and interest rates. Recession:
Recession During recessions, many macro
vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilisation, household incomes, business profits, and inflation all fall while bankruptcies and the unemployment rate rise.
Depression: Depression The phase of depression economic activity is at its low . Wages, cost, price are very low. There is massive unemployment leading to a fall in the aggregate income of the people. This brings down the purchasing power of the community. General demand falls faster than production. The piled-up stock are sold at very high rates of discount leading to heavy loss to the firms. Recovery: Recovery The rising price of an asset Increased economic activity during a business cycle, resulting in growth in the gross domestic product. Collection of all or a portion of a debt previously considered uncollectible. Valuable materials remaining after processing. Proceeds from the sale of an asset that represent depreciation that has already been taken. Indicators: Indicators Economists use changes in a variety of activities measure the business cylce, and to try to predict where the economy is headed. They include: Leading indicators Lagging indicators LEADING INDICATORS: LEADING INDICATORS Variables that change before real output changes. They include: Unemployment claims Manufacturers’ new orders LAGGING INDICATORS: LAGGING INDICATORS Variables that change after real output changes. They include: Inventories to sales ratio Outstanding commercial loans CHARACTERISTICS: CHARACTERISTICS Wave like fluctuation The periods of boom and depression occur alternatively. It is recurring in nature The four phases of trade cycle repeat themselves with some sort of regularity No two trade cycles are identical The cause, impact and periodicity of two trade cycles may not be same. Steep wall towards depression The upward movement towards boom is slow and steady. But the downfall is steep ,sudden and often violent causing disaster all round. Synchronic in nature Different phases of trade cycle occur almost simultaneously in different industry. Effects of business cycles: Effects of business cycles Expansion phase of high growth coupled with large investments, increase in employment, income and expenditure, but that is not all about it. Expansion also comes along with inflation and competition. Recession Recession is unwarranted and creates negative implications for the economy. the basic problems - unemployment, excessive inventory, below capacity operations and liquidation of firms. Controlling business cycle: Controlling business cycle During expansion firms gain, so desired phase & during recession firms suffer, the unwarranted phase Take preventive & corrective measures to minimize their losses during recession and to bring in stability in the economy At Firm Level Investment – balanced mix of debt & equity Inventory – should not create large inventory, just-in-time strategy is helpful Products – diversify in different markets & different products, because in this way risk is also diversified Pricing – flexibility preferred. During recession prices may be adjusted to increase demand At Government level Monetary policy Fiscal policy THANK YOU: THANK YOU