Business Cycle Final Ppt

BUSINESS CYCLE

PRESENTED BY-

Ankita Aggarwal(10/Mba/12) Anubhav Mishra(10/MBA/15)

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What is a business cycle?

A business cycle refers to periods of expansion and contraction of business activity in an economy. It is measured by production of Goods and services or number of people employed. 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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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 • The theory has gone beyond the bounds of the

classical ideas of the business cycle, and frequently offers unorthodox ex planations and proposals.

• It challenges the generally accepted view that the way

to end depressions is to cut expenses, especially wages, and by so doing encourage full employment and revival.

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• In individual plants a reduction of wages may make it possible to expand production and increase employment.

• A general wage cut, however, would simply reduce consumption and accentuate the depression.

• Satisfactory business conditions depend upon maintaining full employment.

Theories of Business Cycle


• Real business cycle theory..• Proposed by Finn E. Kydland and Edward C. Prescott • They attributed economic fluctuations to technological shocks i.e.,

random fluctuations in the productivity level that shifted the constant growth trend up or down.

• Examples of such shocks include innovations, bad weather, imported

oil price increase, stricter environmental and safety regulations, etc. ?


• The general gist is that something occurs that directly changes the effectiveness of capital and/or labour.

• This in turn affects the decisions of workers and firms, who in turn change what they buy and produce and thus eventually affect output. ?


• Politically based business cycle….• It suggests that cycles result from the successive

elections of administrations with different policy regimes.

• Regime A adopts expansionary policies, resulting in growth and inflation

• But is voted out of office when inflation becomes unacceptably high.


• The replacement Regime B, adopts contractionary policies reducing inflation and growth, and the downwards swing of the cycle.

• It is voted out of office when unemployment is too high, being replaced by Party A

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.

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The Conventional Three-Phase Business Cycle

10-4Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved.

Year

ProsperityPeak

Trough Trough

Peak

Peak

2005 2010 2015

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 ExpansionRecession

The Phases of the Business Cycle

Boom

Secular growth trend

DownturnUptu

rn

Trough

Peak

0Jan.-Mar

Tot

al O

utpu

t

Apr.-June

July-Sept.

Oct.-Dec.

Jan.-Mar

Apr.-June

July-Sept.

Oct.-Dec.

Jan.-Mar

Apr.-June

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

Stages of Business Cycle…

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

Stages of Business Cycle…

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

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. 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.

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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. ?

Monetary Policy.....

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

• It is the process to control the supply of money, often targeting the rate of interest, for promoting economic growth and stability.

• Goals – To have relatively stable prices and low unemployment.

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RBI’S Monetary Policy…

• The repo and reverse repo rate had been brought down during the period of recession.

• The CRR was also reduced during the period of recession.

• 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• Investment occurs• Unemployment falls – it may take more than a

year of recovery for large changes in unemployment. ?

Ann

ual g

row

th r

ate

(%)

UK

Growth rates in selected industrial countries

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000

Ann

ual g

row

th r

ate

(%)

UK

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000


-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000

Ann

ual g

row

th r

ate

(%)

UK

France


-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000

Ann

ual g

row

th r

ate

(%)

UK

France

Germany


Ann

ual g

row

th r

ate

(%)

UK

France USA

Germany

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000


Ann

ual g

row

th r

ate

(%)

UK

France USA

GermanyJapan

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1970 1975 1980 1985 1990 1995 2000


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Since the 1980s the global economy business cycles

Current Condition of World’s Economy

• GDP - $74 trillion (PPP)• GDP per Capita (PPP) – $10,500• Annual GDP Growth – -0.8% (2009)• Inflation – 8.43% (December,2010)• People paid below $2 per day – 3.25 billion

( approx 50%)• Millionaires – approx 10 million ( 0.15%)• Unemployment – 4-12% (developed world)

ECONOMY OF INDIA

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Current Condition of India’s Economy

• GDP - $1.501 trillion (nominal,11th rank) $4.002 trillion (PPP,4th rank)

• GDP Growth – 8.9% (Q2,2010)• Inflation – 8.43% (December,2010)• BPL - 37%• Labour Force – 467 million (2009)• Unemployment – 9.4% (2009-10)

Business Cycle Final Ppt

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