BUSINESS CYCLE

PRESENTED BY-

Ankita
? Aggarwal(10/Mba/12)
Anubhav
Mishra(10/MBA/15)
 ?
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.
 ?
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.
 ?
Theories of Business
Cycle …
• 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.

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 Theories of Business
Cycle…
?
• 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. ?
 Theories of Business
Cycle…
?
• 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.
 Theories of Business
Cycle…
?
• 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. ?
 The Conventional Three-
Phase Business Cycle

Peak

Peak
Peak Prosperity

Trough Trough

2005 2010 2015

Year

Copyright 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 10-4
 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.
 The Phases of the Business
Cycle

Expansion Recession Expansion

m
Peak
o
Bo
Do n
ur
Total Output

wn t
tu Up
rn Secular
growth
trend
Trough

0
Jan.- Apr.- July- Oct.- Jan.- Apr.- July- Oct.- Jan.- Apr.-
Mar June Sept. Dec. Mar June Sept. Dec. Mar 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
?
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
November 2008. ?
• Exports had declined by around 12 per cent in

• 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. ?
 ?
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.
?
 ?
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.
?
 ?
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.

?
 Growth rates in selected industrial
10 countries
9 UK
8
Annual growth rate (%)

7
6
5
4
3
2
1
0
-1
-2
-3
1970 1975 1980 1985 1990 1995 2000
 Growth rates in selected industrial
10 countries
9 UK
8
Annual growth rate (%)

7
6
5
4
3
2
1
0
-1
-2
-3
1970 1975 1980 1985 1990 1995 2000
 Growth rates in selected industrial
10 countries
9 UK
8 France
Annual growth rate (%)

7
6
5
4
3
2
1
0
-1
-2
-3
1970 1975 1980 1985 1990 1995 2000
 Growth rates in selected industrial
10 countries
9 UK
8 France
Annual growth rate (%)

7
6
5
4
3
2
1
0
-1
-2
-3
1970 1975 1980 1985 1990 1995 2000
 Growth rates in selected industrial
10 countries
9 UK Germany
8 France
Annual growth rate (%)

7
6
5
4
3
2
1
0
-1
-2
-3
1970 1975 1980 1985 1990 1995 2000
 Growth rates in selected industrial
10 countries
9 UK Germany
8 France
Annual growth rate (%)

7
6
5
4
3
2
1
0
-1
-2
-3
1970 1975 1980 1985 1990 1995 2000
 Growth rates in selected industrial
10 countries
9 UK Germany
8 France USA
Annual growth rate (%)

7
6
5
4
3
2
1
0
-1
-2
-3
1970 1975 1980 1985 1990 1995 2000
 Growth rates in selected industrial
10 countries
9 UK Germany
8 France USA
Annual growth rate (%)

7
6
5
4
3
2
1
0
-1
-2
-3
1970 1975 1980 1985 1990 1995 2000
 Growth rates in selected industrial
10 countries
9 UK Germany
Japan
8 France USA
Annual growth rate (%)

7
6
5
4
3
2
1
0
-1
-2
-3
1970 1975 1980 1985 1990 1995 2000
 Growth rates in selected industrial
10 countries
9 UK Germany
Japan
8 France USA
Annual growth rate (%)

7
6
5
4
3
2
1
0
-1
-2
-3
1970 1975 1980 1985 1990 1995 2000
Since the 1980s the global economy business

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cycles

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 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)
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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)
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