Business cycle Managerial Economics

Business Cycle

Business Cycle-Martin Thomas

The term business cycle is referred to the recurrent ups and downs in the level of economic activity that extend over a period of time. The business fluctuations occur in aggregate variable such as national income, employment and price level.

Business cycle is also called as “Trade Cycle”

4 Phases of Business Cycle

Prosperity Phase : Expansion or Boom or Upswing of economy.

Recession Phase : from prosperity to recession (upper turning point).

Depression Phase : Contraction or Downswing of economy.

Recovery Phase : from depression to prosperity (lower turning Point).


Prosperity: Expansion & Peak


When there is an expansion of output, income, employment, prices and profits, there is also a rise in the standard of living. This period is termed as Prosperity phase.

Rise in the national output & trade Rise in consumer and capital expenditure Rise in the Price of raw materials and

finished goods Rise in the level of income & employment

Fig.1

Recession & Turning Point


During a recession period, the economic activities slow down. When demand starts falling, the overproduction and future investment plans are also given up. There is a steady decline in the output, income, employment, prices and profits.

Depression & Trough


When there is a continuous decrease of output, income, employment, prices and profits, there is a fall in the standard of living and depression sets in. During the phase of Depression:

The growth rate become negative The level of national income and expenditure

declines Price of consumer and capital goods decline Workers lose their job

Recovery Phase


As the recovery gathers momentum, some firms plan additional investment; some undertake renovation programmes, and some undertake both. These activities generate construction activities in both consumer & capital goods sector. As a result more employment is generated and wage rates moving upward.


TROUGH

Fig.2


Fig.3


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Business cycle Managerial Economics