21. Business Cycles

8/6/2019 21. Business Cycles

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TOPICS

1. Business Cycles.

2. Phases of Business Cycles.

3. Multiplier Accelerator Theory.

4. Demand Induced Cycles.

5. Other Theories of Business Cycles.

6. Forecasting Business Cycles.

7. Employment Fluctuations.

8. The Concept of Full Employment.

9. Nature and Trends of Unemployment in India.


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Economic growth never smooth.

High rate of growth, continuous expansionfollowed by recession.

Long recession leads to depression.

Two main phases: Recession andexpansion.

Turning points: peaks and troughs.


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TWO CHARACTERISTICS OFRECESSION


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FEATURE: 1

Decline in consumer spending.

Creation of huge inventories.

Decline in demand.

Firms lay off employees.

Results in high unemployment.


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Feature: 2

Fall in output.

Inflation falls.

Decline in demand of crude materials.

Prices fall.

Wages and prices do not fall in the same pace.

Fall profits.

Fall in demand for credit.

Fall in interest rates.


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PHASES OF BUSINESS CYCLES


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Expansion

Also called prosperity.

Contributors: gap between costs andprices.

Possibility for producers to produce more.

More employment opportunities.

Increase in purchasing power of thepeople.


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Recession

Expansion factors set the base forrecession.

Cost increase relative to price.

Profit margins decrease.

Expansion activities slow down.

Scarcity of different products prices startrising.

Cost of production also continue to rise.


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Depression

Banks loans are liquidated.

Further fall in prices.

More new projects are canceled.

Creates more unemployment.

Drastic fall in output, employment and

general price level.


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Recovery

Stop in the price fall.

Companies begin using idle capacities.

Production picks up.

More employment opportunities.

Leads to long run upward movement inprices.

Encourages investment and growth.


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Based on the interaction betweenmultiplier and accelerator.

Accelerator: rapid output growthstimulates more output growth.

A certain growth rate for a constantvolume of investment.

Full employment a ceiling beyond whichoutput cannot grow.

A floor level wherein gross investmentcannot be negative.


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Recession: decline in aggregate demand lowersthe output.

With no change in aggregate supply outputdeclines.

Price level would also fall.

Boom: aggregate demand curve shifts to theright.

Output reaches potential GDP or even higher.

Prices rise.

Shifts in Aggregate Demand lead to fluctuationsin output, employment and prices.


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Often used as key indicator of countryseconomic situation.

Keynes

Employment determined by effectivedemand.

Raised by increasing effective demand.

Comprises aggregate demand &

aggregate supply generated within theeconomy.

Rise in investment raises effectivedemand & helps solve unemployment.


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Types of Unemployment

Frictional Unemployment Due to constant changes in the labor market.

Employers not fully aware of all the availableworkers.

Employees not aware of existing jobopportunities.

Structural Unemployment Due to structural changes in the economy.

Eliminates a few jobs & creates some new jobs.

Cyclical Unemployment Due to downturn in economic activity.


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Not mean zero unemployment.

Natural rate of unemployment exists.

Meaning: average unemployment caused byfrictional and structural changes in the labormarket.

Need to distinguish between natural rate & actualrate of unemployment.

Actual unemployment revolves around naturalrate of unemployment.

Actual rate rises above natural rate duringrecession.

Actual rate falls below actual rate during boom.


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Documents

21. Business Cycles