EConomics Trade Cycles

7/31/2019 EConomics Trade Cycles

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Presented By

Apoorva Bhandary 112 Ashwin Ganagadharan68

Kevin Coelho 104 Munesh Sharma 119

Ninad Malgaonkar 117 Harsh Sankhala 62


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BUSINESS CYCLE

The business cycle occurs when economicactivity speeds up or slows down.

The business cycle is the periodic butirregular up-and-down movements ineconomic activity, measured by fluctuationsin real GDP and other macroeconomicvariables.

A business cycle is a swing in total national

output, income and employment, usuallylasting for a period of 2 to 10 years, markedby widespread expansion or contraction inmany sectors of the economy.


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CAUSES OF BUSINESS CYCLES

Fluctuation in supply and Demand

Changes in business confidence

Alternating periods of stocking & de-stocking

Changes in the amount of spending on large consumer

items

Changes in govt policy


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PHASES

Expansion/Boom

Recession

Contraction

Revival/Recovery


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Expansion ExpansionRecession

THE PHASES OF THE BUSINESSCYCLE

B

oom

Seculargrowthtrend

Downturn

Upturn

Trough

Peak

0Jan.-

Mar

TotalOutput

Apr.-June

July-Sept.

Oct.-Dec.

Jan.-Mar

Apr.-June

July-Sept.

Oct.-Dec.

Jan.-Mar

Apr.-June


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EXPANSION/BOOM

Expansion-Characterised by high capital investment inbasic industries as a result of high stock ,high prices ,highprofits and full employment

This stage is the peak of trade cycle & is also termed asBoom Stage

Characteristics of Expansion:

1. Demand for consumer goods and production rises

2. Demand, output, employment & income are at a high level

3. Rise in prices

4. Investment Increases

5. More profits


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RECESSION

Recession-Here most business enterprise fail, pricescollapse & confidence is shaken. buildingconstruction slows down & unemployment increases

There is fall in income, expenditure, demand, prices

& profit. This stage will have a cumulative effect onthe economy.Characteristics of Recession

1. fall in income or output

2. increase in unemployment

3. fall in prices4. liquidation in stock prices

5. strain in banking system

6. Decline in profits

7. fall in investments


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CONTRACTION

Contraction/Depression-Here there will be a generaldecline in economic activity. Characterised by shortfall in

production, mass unemployment, fall in prices, low wagesetc.

The general decline in economic activity leads to fall inbank deposits, credit expansion stops because the businesscommunity is not willing to burrow. bank rate fallsconsiderably

Characteristics of Contraction

1. mass unemployment

2. Fall in profits ,interests rates, bank deposits ,loans

3. factories close down

4. Fall in profit


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RECOVERY

Recovery-During depression shortage of goods is

experienced. As a result investment increases, Prices

and wages also increases in this stage.

The recovery takes place due to the followingreasons:

1. new government expenditure

2. Exploitation of new sources of energy

3. Innovations

4. Investment in new areas

5. Changes in technologies of production


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CHARACTERISTICS OFBUSINESS CYCLES

Business cycles occur Periodically

Business cycles are synchronic

Consumption of non-durable goods and services does not

vary much during different phases Consumption of durable goods is affected most by

cyclical fluctuations

The immediate impact of cyclical fluctuations is on

inventories Business cycles are international in character

Profits are affected more than any other income


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SHAPES OF TRADE CYCLE There are different types of shapes a recession and recovery

chart can take. Employment, GDP and the industrial output are the different

economic measure taken into account

The different shapes are

a) V-shaped

b) U-shaped

c) W-shaped

d) L-shaped

The shapes take their names from the approximate shape

economic data make in graphs


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SHAPES OF TRADE CYCLE V shaped

a) A type of economic recession and

recovery that resembles a "V" shape.

b) A V-shaped recovery involves a sharp

decline in the metrics followed by

sharp rise back to its previous peak

U shaped

a) A U-shaped recovery involves a gradual

decline in these metrics followed by a gradual

rise back to its previous peak.

b) Compared to V-shape, the

U-shaped recovery takes longer to

reach levels seen prior to the start of

the recession.


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SHAPES OF TRADE CYCLE W shaped

a) A W-shaped recovery involves a sharp

decline in the metrics followed by a

sharp rise back to the previous peak,

followed again by a sharp decline and

ending with another sharp rise

b) A W-shaped recovery generally characterizes

a period of extreme volatility compared to other types of recoveries

L shaped

a) An L-shaped recovery involves a sharp

decline in the metrics followed by a long

period of flat or stagnant growth.

b) This is the most severe of the different

shapes of recession


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BUSINESS CYCLES INDICATORS

Economic indicators can be classified into three categories

according to their usual timing in relation to the business cycle:

leading indicators, lagging indicators, and coincident indicators.

Leading indicators Leading indicators are indicators that usually change before the

economy as a whole changes.

They are therefore useful as short-term predictors of the economy.

Stock market returns are a leading indicator: the stock market

usually begins to decline before the economy as a whole declines

and usually begins to improve before the general economy begins to

recover from a slump.


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Lagging indicators

Lagging indicators are indicators that usually change after the

economy as a whole does.

Typically the lag is a few quarters of a year.

The unemployment rate is a lagging indicator: employment tends

to increase two or three quarters after an upturn in the general

economy.

Coincident indicators

Coincident indicators change at approximately the same time as the

whole economy, thereby providing information about the current

state of the economy.

There are many coincident economic indicators, such as Gross

Domestic Product, industrial production, personal income and

retail sales.

A coincident index may be used to identify, after the fact, the dates

of peaks and troughs in the business cycle


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The 10 Components of Leading Indicators to perdictactivity in U.S.Economy

Average weekly hours (manufacturing)

Average weekly jobless claims for unemployment insurance

Manufacturers' new orders for consumer goods/materials

Vendor performance (slower deliveries diffusion index)

Manufacturers' new orders for non-defense capital goods Building permits for new private housing units.

The Standard & Poor's 500 stock index

Money Supply (M2)

Interest rate spread (10-year Treasury vs. Federal Funds target) Index of consumer expectations.


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The Index of Lagging Indicators is published monthly by TheConference Board, a non-governmental organization, whichdetermines the value of the index from seven economicvariables. These components tend to follow changes in theoverall economy.

The components are:

The average duration of unemployment (inverted)

The value of outstanding commercial and industrial loans

The change in the Consumer Price Index for services

The change in labour cost per unit of output

The ratio of manufacturing and trade inventories to sales

The ratio of consumer credit outstanding to personal income

The average prime rate charged by banks


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There are four economic statistics comprising the Index of

Coincident Economic Indicators:

Number of employees on non-agricultural payrolls Personal Income less transfer payments

Industrial production

Manufacturing and trade sale

The Philadelphia Federal Reserve produces state-levelcoincident indexes based on 4 state-level variables:

Nonfarm payroll employment

Average hours worked in manufacturing

Unemployment rate

Wage and salary disbursements deflated by the consumer price

index (U.S. city average)


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AGENCIES

NBER: National Bureau of Economic Research Founded in 1920, an American private non-profit research

organization

The NBER is well known for providing start and end datesfor recessions in the United States

Business cycle standing committee The NBER's research activities are mostly identified by 19

research programs on different subjects and 14 working groups

OCED: Organisation for Economic Co-operation andDevelopment Organization of 34 countries founded in 1934 It Its mandate covers economic, environmental, and social

issues.

It carries out research on European countries and major Asainand African countries


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EXAMPLES

The Great Depression and World War II

The worst economic contraction was the Great Depression of the1930s

Leading Factors: Thousands of banks failed, the stock market

collapsed, many farmers went bankrupt, and international trade was

halted

Coincidental Factors: Real GDP fell nearly 30% from the peak in

August 1929 to the trough in March 1933

Lagging Factors: The unemployment rate rose from 3% to

nearly 25%

The Great Depression ended with the start of World War II

Wartime production brought the unemployment rate below 2%

Real GDP almost doubled between 1939 and 1944


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GREAT DEPRESSION- BUSINESSCYCLE


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2008-RECESSION


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Documents

EConomics Trade Cycles