BUSINESS CYCLE

PRESENTED BY-

INDU KUMARI
MANORANJAN PAUL
NALINAKSH TRIPATHI

? RANJIT NAYAK
SAURABH KUMAR SONI
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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.
Business Cycle…
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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…
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IS IT CYCLE OR FLUCTUATION?

In recent years economic theory has moved towards

the study of economic fluctuation rather than a business

cycle.
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• Keynesian Theory
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Theories of Business Cycle…

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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Theories of Business Cycle…

• 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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Theories of Business Cycle…
• 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.
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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
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Stages of Business Cycle…

Employment up
• Peak
Production highest
Employment highest
Inflationary pressure
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Stages of Business Cycle…
• Contraction
Production down
Employment down
Recession
• Trough
Production lowest
Employment lowest
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• 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.
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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.
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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.
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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.
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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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