economic cycle.ppt

7/18/2019 economic cycle.ppt

1/32

The Economic Cycle

AS Econom cs

PowerPoint Briefings 2006PowerPoint Briefings 2006

tutor2ututor2u
http://www.tutor2u.net/http://www.tutor2u.net/http://www.tutor2u.net/


2/32

Mrs G

What is a business cycle?
http://www.tutor2u.net/http://www.tutor2u.net/


3/32

Mrs G

Syllabus aims within Business Cycle

You must be able to

Identify the phases of the business cycle

Identify the causes of Business cycleinstability, (durables, stock levels and

investment decisions)

Explain the Theories Of Business ycle

!o" to control Economic ycle


4/32

Mrs G

Business Cycle & Long term trends


5/32

Mrs G

efinition of Business Cycle

According toJ.A.Estay:

#Business cycles are fluctuation in $eneral businessactivity that appear throu$h the inter%related of

many specific cycles&'

According to Prof. Kenynes:

Trade ycle is composed of periods of $ood tradecharacteried by risin$ price and lo" unemployment

percenta$e alterin$ "ith periods of bad trade

characteried by fallin$ price and hi$h

unemployment percenta$e&'

In Simple words:

#Business ycle is a fluctuation of the economy

characteried by periods of prosperity follo"ed by

periods of depression&'


6/32

Mrs G

!ccor"ing to #ose$h Business Cycle has % ste$s&&&

BOO*+Expansion+rosperity- #The peak activity level of business or economy is

called Boom&'

.ecession-

#The rapid decrease in the business activity levelis called .ecession&'

/epression+ontraction-

#The lo"est sta$e+level of business or economic

activity is called depression&' .ecovery+.evival-

#The $radual increase in business activity is called

.evival&'


7/32Mrs G

Phases of Business Cycle'


8/32Mrs G

(ey Conce$ts ) *&&P

*ross omestic Pro"uct'

0 The value of output of $oods and services produced in thecountry durin$ one year

0 Includes all rimary, secondary and tertiary sectors

0 an be vie"ed as bein$ national income, national output

or a$$re$ate demand (1/)

0 2/ per capita 0 2/ divided by the population (2/ per

head)

1ll countries experience economic cycles

"ith their 2&/&


9/32Mrs G

Characteristics of an Economic Boom

3tron$ and risin$ level of1/ Often driven by fast$ro"th of consumption

.isin$ employmentand real "a$es

!i$h demandfor imported $oods 4 services 2overnment tax revenues "ill be risin$

5uickly

ompany profitsand investmentincrease

Increased utilisationrate of existin$

resources


10/32Mrs G

Business an" a Boom+

1 boom occurs "hen national output is

risin$ at a rate faster than the trend rate of$ro"th6i&e& faster than 2ovt expects7

It is characterised by !I2! consumerspendin$, hi$h business confidence,

investments and profits7

There is a lot more output&


11/32Mrs G

,n a boom- what ha$$ens to &

2ro"th8

onsumer spendin$8

Employment8

Business confidence8 9ould you I:;E3T

or rationalise in a Boom8 onsumer confidence8 9ould you spend,

invest or borro" in a boom8

Can youeplain w!y"


12/32Mrs G

Characteristics of an Economic .ecession

/eclinin$ a$$re$ate demandfor a economy

output ontractin$ employment+ risin$

unemployment

3harp fall in business confidence 4 profits /ecrease in fixed capitalinvestment

spendin$

.educed inflationarypressure


13/32Mrs G

.ecession

In a recession "hat happens to

2ro"th8

onsumer spendin$8

Employment8 Business confidence8

9ould you I:;E3T or rationalise in a

do"nturn+slump8 onsumer confidence8

9ould you spend, invest or borro" in a

do"nturn+slump8


14/32Mrs G

Therecessionof the early 1990s


15/32Mrs G

e$ression&&&

9hen there is a continuous decrease of

output , income , employment , prices4profits , there is a fall in the livin$ standard

of people n depression sets in&

1 phase of the business cycle in "hich the

economy as a "hole is in decline& *ore

specifically, contraction occurs after the

business cycle peaks, but before it becomes

a trou$h& 1ccordin$ to most economists, acontraction is said to occur "hen a country>s

real 2/ has declined for t"o or more

consecutive 5uarters&


16/32Mrs G

Characteristics of e$ression&&&


17/32Mrs G

.eco/ery&&&

The turnin$ point from depression to

expansion is termed as recovery& In the revival sta$e of the business cycle,

consumers start to feel more confident that

the "orst is behind them and they start to

spend a$ain& Economic indicators like the

2/ start to move hi$her after lon$ periods

of decline, employment numbers start to

look $ood a$ain, some businesses start tospend more money a$ain&


18/32Mrs G

Characteristics of .eco/ery or .e/i/al&&

There are expansion4 rise in economic

activities& /emandrise increases in production4

investment&

3teady rise in Output , Income, Employment, price 4 rofit&

1/increases&

The banksexpand redits&


19/32

Mrs G

arious Theories1f Business Cycles'

1/er,n/estment Theory

,nno/ation Theory

(eynes3s Theory


20/32

Mrs G

1/er,n/estment Theory&&&

The economy comes out of its do"ns"in$

as income increases and people revert toearlier consumption and expenditure levels&

This helps economy to recover and the

ups"in$ starts a$ain& This theory says that

the over investment due to forced savin$ bypeople in inflation is the cause of

fluctuations in economic activities& !ayek

says, voluntary savin$ leads to chan$e in

structure of production permanently but

forced savin$ brin$s chan$es "hich are not

permanent


21/32

Mrs G

,nno/ation Theory&&&

?oseph 3chumpeter has explained the

expansion and contraction throu$h industrialinnovation& In this theory, 3chumpeter says,

any innovation can move the economy to

dise5uilibrium from e5uilibrium and this "ill

continue till the ne" e5uilibrium position isreached&


22/32

Mrs G

(eynes theory&&

1ccordin$ to keynes in the short run, the

level of income, output and employment isdetermined by the level of a$$re$ate

effective demand& 1$$re$ate demand is

composed of demand for consumption

$oods and demand for investment $oods&?&*& @eynes is of the vie" that it is the

chan$es in the level of a$$re$ate demand

"hich brin$ about fluctuations in the level of

income output and employment&


23/32

Mrs G

Characteristics 1f Business Cycle'

A&


24/32

Mrs G

Causes of the Business cycle fluctuations

han$es in business confidence&

1lternatin$ periods of stockin$ 4 de%

stockin$&

han$es in the amount of spendin$ on

lar$e consumer items&

han$es in $ovt policy&


25/32

Mrs G

ProhibitiveMeasures

CurativeMeasures

4easures to Control Business cycle'


26/32

Mrs G


5cont3"

rohibitive*easures-

In prohibitive *easures, it is tried to not

start a Business ycle& It means to takesome initial measures so that the business

cycle could not start, and economy could

not affect from its dan$erous effects


27/32

Mrs G


urative*easures-

7&8iscalPolicy'

2&4onetaryPolicy'

9& ,nternationalTheory'


28/32

Mrs G

8iscal Policy'


29/32

Mrs G

4onetory Policy'

The actions of a central bank, currency

board or other re$ulatory committee thatdetermine the sie and rate of $ro"th of the

money supply, "hich in turn affects interest

rates&

*onetary policy is maintained throu$h

actions such as increasin$ the interest rate,

or chan$in$ the amount of money banks

need to keep in the vault (bank reserves)&


30/32

Mrs G

,nternationalTheory'

/ifferent measures have been su$$ested

by the economists to control the businessfluctuations effectively& 3uch as-

(a)& ontrol of international production&

(b)& International bill stock control and

international investment control&


31/32

Mrs G

:uic; :uestions

9hat sta$e of the business cycle do you

think the akistani Economy is in no"8

!o" is the business cycle measured8

9hy does Investment fluctuate more than

consumption in the business cycle8

9hat "ays mi$ht a business benefit from

a recession8


32/32

#$A%K &'( So)(C$
http://www.tutor2u.net/

Documents

economic cycle.ppt