Business Cycle Prafful

7/28/2019 Business Cycle Prafful

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Prepared by

:Prafful P. BhaleraoRoll Call: 04

BUSINESSCYCLE


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Business Cycle

Alternating increases and decreases in

the level of business activity of varying

amplitude and length.


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Definition

The business cycle in the general

sense may be defined as an

alternation of periods of prosperityand depression of goods andservice.

- Harberler


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Business Cycle

The Business Cycle allows people to

understand the direction the economy

(GDP) is going (growing or shrinking) and

plan accordingly.

The economy follows the Business Cycle

regularly.


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Phases of the Business Cycle

Expansion (Growing)

Peak (Top)

Contraction (Shrinking)Trough (Bottom)


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Business Cycle

Peak

Trough

Peak


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Expansion

During a period of expansion:

Wages increase

Low unemployment

People are optimistic and spending money High demand for goods

Businesses start

Easy to get a bank loan Businesses make profits and stock prices

increase


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Peak

When the economic cycle peaks:

The economy stops growing (reached the top)

GDP reaches maximum

Businesses cant produce any more or hire

more people

Cycle begins to contract


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Contraction

During a period of contraction:

Businesses cut back production and layoff

people

Unemployment increases

Number of jobs decline

People are pessimistic (negative) and stop

spending money Banks stop lending money


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Trough

When the economic cycle reaches atrough:

Economy bottoms-out (reaches lowest point)

High unemployment and low spending Stock prices drop

But, when we hit bottom, no where to go butup!

UNLESS.


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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 besame.

Steep wall towards depression

The upward movement towards boom is slow and steady. But

the downfall is steep ,sudden and often violent causingdisaster all round.

Synchronic in nature

Different phases of trade cycle occur almost simultaneously indifferent industry.


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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 alsocomes along with inflation and

competition.


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Effects of business cycles

Recession

Recession is unwarranted and creates

negative implications for the economy.

the basic problems - unemployment,

excessive inventory, below capacity

operations and liquidation of firms.


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What keeps the Business Cycle

Going?

4 variables cause changes in the

Business Cycle:

1. Business Investment

When the economy is expanding, sales and

profit keep rising, so companies invest in

new plants and equipment, creating new

jobs and more expansion. In contraction, theopposite is true.


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What Keeps the Business Cycle

Going?

2. Interest Rates and Credit

Low interest rates, companies make new

investments, adding jobs. When interest

rates climb, investment dries up and less jobgrowth.

3. Consumer Expectations

Forecasts of an expanding economy fuelsmore spending, while fear of a recession

decreases consumer spending.


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What keeps the Business Cycle

Going?

4. External Shocks

External Shocks, such as disruptions of theoil supply, wars, or natural disasters greatly

influence the output of the economy.

Ex. 1992-2000 was the longest period ofexpansion in U.S. history. Early in 2001,

signs of contraction appeared, though theBush administration denied it. The Sept. 11th2001 terrorist attacks quickly caused thebusiness cycle to shift into a contraction.


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Controlling business cycle

During expansion firms gain, so desired phase &during recession firms suffer, the unwarrantedphase

Take preventive & corrective measures tominimize their losses during recession and tobring 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


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Controlling business cycle

Products diversify in different markets &

different products, because in this way risk is

also diversified

Pricing flexibility preferred. During recessionprices may be adjusted to increase demand.

At Government level Monetary policy

Fiscal policy


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THANK YOU

PR

Documents

Business Cycle Prafful