Business cycle

BUSINESS CYCLE

PRESENTED BY-

Sarfraz Shaikh

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What is a business cycle?

A business cycle refers to periods of expansion and contraction. A peak is the high point following a period of economic expansion. A trough is the low point following a period of economic decline.

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Business Cycle…

?According to Arthur F. Burns and Wesley C. Mitchell..

• Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises.

• A cycle consists of:

Expansions.

General recessions.

Contractions

And revivals which merge into the expansion phase of the next cycle.

According to Joseph Business Cycle has 4 steps…..

• Expansion: Increase in production and prices, low interests rates.

• Crisis: Stock exchanges crash and multiple bankruptcies of firms occur.

• Recession: Drops in prices and in output high interests rates.

• Recovery: Stocks recover because of the fall in prices and incomes.

Business Cycle…

?IS IT CYCLE OR FLUCTUATION?

In recent years economic theory has moved towards

the study of economic fluctuation rather than a business

cycle. ?

?Theories of Business Cycle…

• Keynesian Theory Fluctuations in aggregate demand cause the

economy to come to short run equilibrium at levels that are different from the full employment rate of output. These fluctuations express themselves as the observed business cycles.

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• Real business cycle theory.. Economic crisis and fluctuations cannot stem

from a monetary shock, only from an external shock, such as an innovation.

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• Politically based business cycle…. The political business cycle is an alternative theory

stating that when an administration of any hue is elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. It then adopts an expansionary policy in the lead up to the next election, hoping to achieve simultaneously low inflation and unemployment on Election Day.

?How we measure business cycle ?

• The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in Real GDP and other macroeconomic variables.

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?What is Real GDP and Nominal GDP??

• Real Gross Domestic Product measures the value of all the goods and services produced expressed in the prices of some base year.

• The Nominal Gross Domestic Product measures the value of all the goods and services produced expressed in current prices. On the other hand

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?Stages of Business Cycle…

• Expansion: A speedup in the pace of economic activity.

• Peak: The upper turning of a business cycle.

• Contraction : A slowdown in the pace of economic activity.

• Trough : The lower turning point of a business cycle, where a contraction turns into an expansion.


• Expansion Production up Employment up • Peak Production highest Employment highest Inflationary pressure

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• Contraction Production down Employment down Recession • Trough Production lowest Employment lowest • Revival

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Parts of Business Cycle - PEAK

• Low levels of unemployment – shortages of labour occur pushing up wage rates

• High levels of consumer borrowing and spending

• Firms working at full capacity• Profit levels high• Inflation Increasing• Interest rates increasing• Boom in housing market

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?Parts of Business Cycle: Recession…

• Recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction.

• Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization household incomes, business profits and inflational fall during recessions.

• Bankruptcies and the unemployment rate rises.

?Recession in U.S….

• The United States housing market correction a possible consequence of United States housing bubble and subprime mortgage crisis has significantly contributed to a recession.

• U.S. employers shed 63,000 jobs in February 2008.• The unemployment rate of US grew to 8.5 percent

in March 2009, and there have been 5.1 million job losses till March 2009 since the recession began in December 2007.

?Recession: Impact on India

• Exports had declined by around 12 per cent in November 2008.

• There was a double-digit decline owing to lack of demand from most of the buying markets including the US, the UK, Japan and other countries in the Euro zone. These are India’s major export destinations.

• Indian industry has also shrunk for the first time in 15 years with a 0.4 per cent year-on-year decline in October 2008. The growth was about 12.2 per cent in October last. It had been partly due to a dip of over 12 per cent in India’s exports.

?How to tackle the Recession

Government Measures….

• The government attempt to control fluctuations in economic growth

• Aims to achieve growth at around trend level.• The Government use Fiscal and Monetary

policy to achieve this objective.?

?Fiscal Policy....

• It is represented by the executive and legislative branches of government and captures changes in taxes (T) and government spending (G).

• If the economy is in a recession, a combination of tax cuts and increases in government spending can stimulate economic activity.

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?Monetary Policy.....

• It is conducted by the central bank of a country.

• Monetary policy embraces banking and credit policy relating to loans and interest rates as well as the monetary standards and public debt and its management.

• In a depression a policy of chief money may be adopted o stimulate business investment and thus assist recovery.

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?RBI’S Monetary Policy…

• The repo had been brought down to 6.5 per cent effective November 3, 2008 and

• The CRR reduced to 5.5 per cent effective November 8, 2008.

• There is no doubt these measures have helped the economy and thereby the demand for goods and services.

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?Parts of Business Cycle: Revival …

• Consumer confidence grows – leading to increased borrowing and spending

• Firms increase output – build up stock levels• Spare capacity used, then• Investment occurs• Unemployment falls – it make take more than

a year of recovery for large changes in unemployment. ?

Current Condition of World’s Economy

• According to Market Watch US economy is slowly recovering.

• Current unemployment rate in US is 7%• Current unemployment rate in India is 7%• Current world economic growth is 2.9%• Indian economy surges 7.9 % in Sept 2009.

THANK YOU?

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Business cycle