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Business Cycle: in The Over All Level of Economic Activity

The document discusses the business cycle, which refers to fluctuations in overall economic activity. It defines the business cycle as alternating periods of expansion and contraction in GDP. The phases of the business cycle are expansion, peak, recession, and trough (or depression). During expansion, business activity and employment increase until reaching a peak. This is followed by a recession where activity declines, and potentially a depression where activity hits bottom. Fiscal and monetary policy can be used to address fluctuations and smooth the business cycle.

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Jagadeesh Putturu
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27 views22 pages

Business Cycle: in The Over All Level of Economic Activity

The document discusses the business cycle, which refers to fluctuations in overall economic activity. It defines the business cycle as alternating periods of expansion and contraction in GDP. The phases of the business cycle are expansion, peak, recession, and trough (or depression). During expansion, business activity and employment increase until reaching a peak. This is followed by a recession where activity declines, and potentially a depression where activity hits bottom. Fiscal and monetary policy can be used to address fluctuations and smooth the business cycle.

Uploaded by

Jagadeesh Putturu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Business Cycle

• Definition: alternating increases and decreases in


the level of business activity of varying amplitude
and length
• How do we measure “increases and decreases in
business activity?”
– Percent change in real GDP!
• Business cycle refers to a wave like fluctuation
in the over all level of economic
activity
Definition
• According to Keynes “A trade cycle is
composed of periods of good trade
characterized by rising prices and low
unemployment percentages, alternating
with periods of bad trade characterized by
falling prices and high unemployment
percentages.”
Characteristics of Business Cycle
• It is a wavelike movement
• It is synchronic in nature
• It occurs periodically and hence recurrent in
nature
• The effects of trade cycles are different on
different activities
• No two phases are quite symmetrical
CAUSES OF BUSINESS CYCLES
• Climatic conditions good or bad create
• variations in business confidence, over optimism
and over pessimism and other psychological
factors
• innovations carried out in industrial and
commercial organizations.
• Nonmonetary factors such as wars, earthquakes,
strikes, crop failures etc.
• Autonomous Investment and Induced Investment
• Either under consumption or over consumption
Phases of Business Cycles

• The ups and downs in an economy are reflected


by the fluctuations in aggregate economic
magnitudes like: Production, investment,
employment, prices, wages, bank credit.
• The ups and down movements in these
magnitudes shows different phases of business
cycles.
• The intermediary stages between peak and
depression there are two stages
THE STAGES OF BUSINESS CYCLES ARE :

• Expansion

• Peak

• Recession

• Depression (Or)Trough
The Phases of the Business Cycle

Expansion Recession Expansion


Expansion Expansion
Level of Business Activity

om
Bo Peak
n
Do
wn tur
tu Up
rn
Secular
growth
trend
Trough

0
. .
Number of Years

.
Expansion Period
• It is characterised by high investment spending lower
interest rates and high optimism.
• Idle resources available and businesses find it easy to
increase production without having to pay more for
inputs.
• Business activity increases and inflation will does not
generally occur. But this will not last for ever.
• Resources are being utilised to the maximum extent
• Slowly the economic activity gains momentum

• This continues leading to the peak period


Expansion Period
• Resources are being utilised to the maximum
extent
• Slowly the economic activity gains
momentum
• National Income starts growing which leads
to rise in consumption spending .
• Accelerator and multiplier effect is observed.
• This continues leading to the peak period
Peak Period
• During the period of prosperity an economy
experiences a high level of output, income,
employment and trade.
• There is all round expansion, development,
growth and prosperity in the economy.

• The stage signifies the temporary maximum of


the expansionary period.
• Production and full employment is achieved.
Peak Period Con
• Slowly resources shortage starts which will
push the cost of production .
• Competition increases among buyers.
• Inflation thus characterises the peak of a
business cycle.
• Business activity will be at the high level .
• The USA experienced the longest period of
prosperity between 1923 &29.
Recession Period
• The last stages of the boom period set the
stage for a recession in the economy .
• The period of recession begins when the
phase of prosperity ends.
• It is a period of time where in the aggregate
level of economic activity starts declining.
• There is contraction or slowing down of
business activities.
Recession Period Con
• Imbalance between supply and demand exits.

• Multiplier and accelerator work in the reverse


direction in the economy.

• A real GDP declines during the period of recession .

• Prof. M. W. Lee remarks, “A recession, once started, tends


to build upon itself much as
forest fire.
Depression
• Once the recession starts and if it is not
controlled it results in depression.
• In this period aggregate level of economic
activity reaches its rock bottom position.
• GDP decreases, investment spending is
minimum and consumption spending is
minimum.
• A sharp reduction in the volume of output, trade
and other transactions.
• An increase in the level of unemployment.
Depression Period Cont
• A sharp reduction in the aggregate income of
the community especially wages and profits.

• In a few cases, profits turns out to be negative

• If proper action is taken by the government


severe effects will not be faced by the economy
Measures to control Trade Cycles
• Business cycles can be controlled by appropriate
fiscal policy and monetary policy.
• When the economy enters the recessionary phase,
government spending should be increased (fiscal
policy measure).
• This includes infrastructure projects, subsidies to
productive sectors, etc. When infrastructure projects
are undertaken, there is requirement of labor (when
roads are built, construction labor is required), which
leads to employment.
Control Measures
• Also supplies of cement, iron, steel, etc is
required. The production of these commodities
increase.
• People start earning wages.
• They earn, and so they consume more.
• As a result of which economy enters into
expansion phase. Thanks to subsidies, cost of
production goes down. The producers can offer
products at lower cost.
Measures to control Trade cycles
• When the economy enters expansionary
phase which is above the normal growth path,
monetary measures by Central banks are
effective.
• The central bank tries to reduce the money in
circulation with its open market operations
and by increasing Reserve requirements.
Measures
• Basically contractionary monetary or fiscal
measures are used to deal with high growth
and inflation- During the period of boom.
Ex:Open market operations and discourage
banks from granting new loans.
• Expansionary monetary or fiscal policy is
applied during the recession and depression
period.
• Miscellaneous Measures:
• (i) Introduction of automatic stabilizers
• (ii) Price support policy
• The policy of stabilization of the prices of
agricultural products in India through
procurement and building up of buffer stocks
aim at economic stability.
• Foreign aid
• several measures are to be taken to smoothen
the cyclical movements and to ensure economic
stability in an economy
Business Cycles And Business Decisions

• Business cycles affect the smooth growth of an economy.


• Expansionary phase has, however, a favorable impact on
income, output and employment.
• But recession and depression imply slackness in growth,
contraction of economic activity, increasing
unemployment, falling incomes and so on.
• Business cycles have their effects on individual business
firms, as well.
• During expansionary phase, there is a business boom.
The firm gains due to rising demand, rising prices and
increasing profits.
Business Cycles And Business Decisions

• Prosperity makes the business firms prosperous. But


in a capitalist economy prosperity digs its own grave.
• During this period, a firm may have to face some
adverse effects. Rising prices and optimism in the
market may encourage many new firms to enter the
market and the existing firms to expand their output.
• Competition becomes intense. Increased demand for
factors may cause a rise in their prices.

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