Business Cycle& Ni

8/3/2019 Business Cycle& Ni

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BUSINESS CYCLE

A study of fluctuations in

business activity (output , income, prices, profits,

employment )


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Characteristic features

It occurs periodically

It is international in character

It is wave like

The process is cumulative

The cycles will be similar but not

identical


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Business cycle

Depression

Recession

Crisis

Revival

Boom /

Prosperity

peak


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Depression The level of economic activity is

extremely low

Low income, production, employmentprices, profits

Low prices leads to low profit, lowwages, people suffer, closing down ofbusiness


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Recovery

Slow increase in output, employment,income and price.

Increase in demand, investment,bank loans and advances.

This leads to recovery, revival,prosperity


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Prosperity

Increase in income, employment, nowastage.

Increase in wages, prices, profits andinterest.

Increase in demand for loans, scarcityof labour, raw material and otherfactors of production.

That leads to recession


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Recession

Reduction in investment, employmentand production.

Reduction in income, expenditure,prices and profits.

Reduction in bank loans.

The business expansion stops

That leads to depression


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Theories Sunspot theory / climate theory

Psychological theory

Monetary theory Over-investment theory

Over-savings / under

consumption theory Innovation theory


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NATIONAL INCOME The national income committee of

India has given a simple

definition: National income estimate

measures the volume ofcommodities and services turned

out during a given period countedwithout duplication.


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GNP

The sum of market value of all finalgoods and services produced in a

country during a specific period oftime generally one year.

GNP at factor cost: The sum of allfactor payments (wages, interest,

rent, profits and depreciation)


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GNP = market value of domesticallyproduced goods and services + incomesearned by the residents of a country in

foreign countries incomes earned by theforeigners in the country.

The total value of final goods and servicesproduced by the residents of a country

during a given period of time, including netincome from abroad.


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GNP = Domestic product imports +exports.

Final goods alone to avoid double counting

Goods and services rendered free ofcharges should not be included

Transfer payments not included

Capital gains are not included Income earned through illegal activities


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Methods of measuring GN

P

Output method / production method

Income method

Expenditure method


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GDP

Includes the income locally earned bythe non nationals and excludes theincomes received by the residentnationals from abroad.

GDP = market value of goods andservices produced by the residents inthe country + incomes earned locallyby foreigners incomes received bythe nationals from abroad.


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GDP

Growth rate 1995 7.3 %

1996 7.8

1997 4.8

1998 6.5

1999 6.1

2000 4.4

2001 5.8

2002 3.8

2003 8.5 2004 7.5

2005 - 8.1


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NNP

NNP = GNP Depreciation

NNP is national income available for

consumption and net investment tothe society.

PCI = NNP / Popln.


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Personal income

The sum of all kinds of incomes received bythe individuals from all sources of incomes.

Actual income received by the individualsand households in the country from allsources. Peoples contribution to the societyshould be deducted.

PI = NI corporate income taxes undistributed profits social securitycontribution and transfer payment.


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Disposable personal income All PI is not at their disposal.

DPI = PI personal direct taxes.


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Factors determining NI Quantity

Quality

Technology know-how Political stability


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Difficulties Any income earned abroad have to be

included

To avoid double counting value addedmethod/ nature of goods should beconsidered

Services rendered free of charges arenot included


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Capital gains, transfer payments arenot included

Changes in price level will also affectthe calculation

Value of services rendered by military


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Problems in measuring

Non monetized sector

Illiteracy

Lack of occupational specification Un organized productive activities

Lack of adequate statistical data


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Uses of national income

statistics To frame economic policies

Gives an idea of the structure of the

economy For inter sectoral growth

Inter class income distribution

For international composition ofstandard of living


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It indicates the growth of theeconomy

Distribution of income


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National income and managers Marketing manager

Financial manager

Consumer banking manager Advertising manager

Production manager

Documents

Business Cycle& Ni