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BUSINESS CYCLE
 Business Cycle

2 Business cycle (or trade cycle) refer to the

fluctuations in economic activities
 Characteristics of Business cycles

 Cyclic fluctuations are wave-like

 Recurrent in nature

 Non periodic or irregular ʹ the peaks and

troughs do not occur at regular intervals.
 þhey occur in aggregate variables like
output, income, employment and prices.

 þhe variables move at about the same time

in the same direction but at different rates.

 Upswings and downswings are cumulative in

their effects
@ Cyclical fluctuations are characterized by
alternating waves of expansion and
contraction

@ þhey do not have a fixed rhythm but they are

cycles in that phases of contraction and
expansion recur frequently
 whases of Business cycle
Õ A typical cycle is general divided into four
phases
2 Expansion (upswing)
2 Recession or upper turning point
2 Contraction (downswing)
2 Revival or recovery or lower turning point
 Business cycle phases

@ þhe portion above the equilibrium line is

called the period of prosperity and that
portion below depression
 Actually there are only two phases
expansion and contraction.

 Recession and revival are transitional periods

during which changes in direction occur.
 Effects of Business Cycles
2 Business cycles have both good and bad
effects depending on whether the economy is
passing through prosperity or depression

2 In the prosperity phase there is general

increase in economic activity:
2 þhe rich become richer and the poor poorer

2 Demand for consumer goods does not rise

due to inflationary rise in prices

2 þhis leads to piling up of inventories (stocks)

2 wroducers and traders become pessimists and
recession starts
2 During recession profit margins decline
further because costs rise more than prices
2 Some firms close while other reduce
production trying to liquidate accumulate
stocks.
2 Ôutput comes down, investment and
employment decline and so does income.
2 þhis cumulative process leads to depression