ME-S.17 Business Cycle

8/9/2019 ME-S.17 Business Cycle

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Business cycles

Session 18


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A business cycle can be defned as aswing in total national output ,incomeand employment.

Changes in aggregate demand can have apowerul impact on the over all level ooutput, employment, and prices in theshort run.


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http://www.thebluecollarinvestor.com/blog/recession-a-normal-part-of-the-business-cycle/


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hases o Business Cycles

!n broader terms, there are ourstages or phases in the businesscycle"

1. rosperity

#. $ecession

%. &epression

'. $ecovery


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rosperity is also (nown ase)pansion.

*he gap between the costs and theprices is an important actor in

e)pansion.+ith the widening o the gap, there

is a whole possibility o producersproducing more.

*his results in moreemploymentopportunities, increasing thepurchasing power o the people


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!n the early stages, the gap between costsand price is high and this encourages theentrepreneurs to e)pand their businesses.

!n course o time as cost increase relative toprice, proft margins come down. As aresult, the e)pansion activities slow down.


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urther, new pro-ects are cancelled creatingunemployment.

*he persisting recession results in

depression.

+ith the moving o economy towardsdepression there would be a drastic all in

the output, unemployment and all ingeneral price level.


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*he reat &epression too( placerom 1/%0 to 1/%/.

&uring this time the prices o stoc(ell '0. /,000 ban(s went out o

business and / million savingsaccounts were wiped out.

82,000 businesses ailed, andwages were decreased by anaverage o 20. *he unemploymentrate went rom / all the way to#3, about 13 million -obless

people


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!n the process o recovery, the frst stepis the stop in the price all

Companies start using their idlecapacities, production pic(s up resultingin more employment opportunities.

!n the long run, it would result in upwardmovement in the prices, encouraginginvestment and growth in the economy


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4ultiplier5Accelerator

*heory

*his theory is based on the interactionbetween multiplier and accelerator.Accelerator principle, says that rapid outputgrowth stimulates more output growth.

*his process continues till the economicgrowth reaches a point rom where theeconomy growth rate slows down.

or a constant volume o investment to bemaintained, output must grow at a certainrate.


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6conomic indicators

6conomic indicators are economicstatistics that indicate the presentand uture state o an economy.

*he economic indicators can be usedto identiy the rate at which theeconomy is growing and alsopredict the economy7s uturegrowth rate.

*he list o economic indicators isvery large because any economicstatistic that indicates theeconomic growth o nations can beualifed as an economic indicator.


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eatures o economicindicators

1. $elated to BusinessCycle:6conomy

#. reuency o the &ata

%. *iming


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Related to businesscycle/economy

+ith relation to business cycle, economicindicators may be classifed into"

1. rocyclic

#. Countercyclic%. Acyclic


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6conomic indicators that move in the

same direction as that o the changesin business cycle are (nown asprocyclic economic indicators.

*hese indicators show an increasing

trend when the economy is in boomperiod and show a decreasing trendwhen the economy is underrecession.

Example:*he gross domestic producto a country increases during boomperiod and decreases during

recessionary period.


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Counter cyclic

6conomic indicators that move in theopposite direction as that o the changes inthe business cycle are (nown as countercyclic economic indicators.

*hese indicators show decreasing trendduring boom periods and show an increasingtrend during recessionary periods.

6)ample" *he unemployment rate o acountry decreases during boom period and

increases during recessionary period.


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Acyclic 6conomic indicators that do not establish

a relationship with the changes in thebusiness cycle are (nown as acycliceconomic indicators.

Example:*he income distribution amongthe people o the economy does not haveany relationship with the changes in thebusiness cycle.


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Frequency of the data

6conomic indicators may also beclassifed depending upon the reuencywith which they are released.

6.g." some indicators li(e unemployment

rate are released every month in certaincountries. Some indicators li(e stoc(indices change every minute.


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Timing

&epending upon the timing, economic

indicators may be classifed into"

;eading indicators

;agging indicators

Coincident indicators


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Leading indicators 6conomic indicators that change beore the

occurrence o changes in the economy are(nown as leading economic indicators. *hese indicators indicate an increase or

decrease in the economy at uture date byshowing a decrease or increase in the

numbers. or instance, the stoc( mar(et indices begin

to decline prior to the recession in aneconomy.

*hese indices also show an improvementbeore the economy really begins to pull outo a recession. ;eading economic indicatorshold great value to investors, as theseindicators help them in ma(ing investment

decisions.


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Lagging indicators

6conomic indicators that change

ollowing a given trend o an economy are(nown as lagging indicators. *heseindicators do not orecast but onlyconfrm the long5term trends. or

instance, the unemployment rateincreases conseuent to the decline inthe economy.


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Coincident indicators

An economic indicator that moves along

with the economy i.e. that moves intandem with the economy is (nown as acoincident indicator.

or instance, the & o a nationincreases or decreases along with thechanges in an economy, thus & can betermed as a coincident indicator.


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classifcation

Classifcation o economic indicatorsor

our convenience sa(e, these indicatorscan be classifed into three groups. *heyare"

eneral indicators

Business indicators

Consumption indicators


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!usiness indicators

*he various business indicators

discussed in this chapter are" !ndustrial production

Capacity utili>ation+holesale price inde):producer

price inde)Consumer price inde)$etail salesConstruction spending


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ME-S.17 Business Cycle