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CONTENTS

1. INTRODUCTION
2. CHARACTERISTICS OF BUSINESS CYCLE
3. PASES OF BUSINESS CYCLE
4. EXPAILANTION OF PHASES
5. CAUSES OF BUSINESS CYCLE
6. RECESSION 0F 2008
7. IMPACT OF RECESSION ON INDIAN ECONOMY
8. MEASURES TO TACKLE RECESSION
9. CONCLUSION
10.BIBLIOGRAPHY

INTRODUCTION
The recurring and fluctuating levels of economic activity that an economy experiences
over a long period of time. The four stages of the business cycle Boom Recession Bust
and Recovery. At one time, business cycles were thought to be extremely regular, with
predictable durations, but today they are widely believed to be irregular, varying in
frequency, magnitude and duration.
The Business Cycle, also called the Economic or Trade Cycle, has been studied by
economists for over 100 years. We all know of its effects. Sometimes the economy is
booming are other times when economy is in recession. During times of boom
unemployment is relatively low, wages are rising and inflation is also likely to be rising.
During times of recession unemployment is relatively high, wages may be stagnant and
inflation is likely to be low.
CHARACTRISTICS
Study of trade cycles has revealed two important characteristics:
(1) Its cyclical nature, i.e., periodicity,
(2) Its general nature or synchronism.
In this first place, it has been found that trade cycles occur periodically at fairly regular
intervals.
The interval is not a precise one but the degree of regularity is sufficient to demonstrate
the periodicity of a trade cycle. There is a general consensus of opinion that the cycle
takes seven to ten years nearly to complete itself.
The second characteristic is synchronism. The business world is one a economic unit, like
a living organism. An attack on one part of the business organism is bound to send shock
to the other parts. If one firm is in grief ,those who deal with it cannot remain unaffected,
and they in turn, will affect others with whom they may be in the commercial intercourse.
Thus depression passes From one industry to another. A time comes when all industries
in all districts and all firms in the country are engulfed . Few can escaped deluge.

PHASES OF BUSINESS CYCLE


Business Cycle (or Trade Cycle) is divided into the following four phases :1. Prosperity Phase : Expansion or Boom or Upswing of economy.
2. Recession Phase : from prosperity to recession (upper turning point).
3. Depression Phase : Contraction or Downswing of economy.
4. Recovery Phase : from depression to prosperity (lower turning Point).
Diagram of Four Phases of Business Cycle,
The four phases of business cycles are shown in the following diagram :-

The business cycle starts from a trough (lower point) and passes through a recovery phase
followed by a period of expansion (upper turning point) and prosperity. After the peak
point is reached there is a declining phase of recession followed by a depression. Again
the business cycle continues similarly with ups and downs.

There are four stages that describe the business cycle. At any point in time you are in one
of these stages:
1. Contraction - When the economy starts slowing down.
2. Trough - When the economy hits bottom, usually in a recession.
3. Expansion - When the economy starts growing again.
4. Peak - When the economy is in a state of "irrational exuberance."

Explanation of Four Phases of Business Cycle


The four phases of a business cycle are briefly explained as follows :1. Prosperity Phase
When there is an expansion of output, income, employment, prices and profits, there is
also a rise in the standard of living. This period is termed as Prosperity phase.
The features of prosperity are :1. High level of output and trade.
2. High level of effective demand.
3. High level of income and employment.
4. Rising interest rates.
5. Inflation.
6. Large expansion of bank credit.
7. Overall business optimism.
8. A high level of MEC (Marginal efficiency of capital) and investment.

Due to full employment of resources, the level of production is Maximum and there is a
rise in GNP (Gross National Product). Due to a high level of economic activity, it causes
a rise in prices and profits. There is an upswing in the economic activity and economy
reaches its Peak. This is also called as a Boom Period.
2. Recession Phase
The turning point from prosperity to depression is termed as Recession Phase.
During a recession period, the economic activities slow down. When demand starts
falling, the overproduction and future investment plans are also given up. There is a
steady decline in the output, income, employment, prices and profits. The businessmen
lose confidence and become pessimistic (Negative). It reduces investment. The banks and
the people try to get greater liquidity, so credit also contracts. Expansion of business
stops, stock market falls. Orders are cancelled and people start losing their jobs. The
increase in unemployment causes a sharp decline in income and aggregate demand.
Generally, recession lasts for a short period.
3. Depression Phase
When there is a continuous decrease of output, income, employment, prices and profits,
there is a fall in the standard of living and depression sets in.
The features of depression are :1. Fall in volume of output and trade.
2. Fall in income and rise in unemployment.
3. Decline in consumption and demand.
4. Fall in interest rate.
5. Deflation.
6. Contraction of bank credit.
7. Overall business pessimism.

8. Fall in MEC (Marginal efficiency of capital) and investment.


In depression, there is under-utilization of resources and fall in GNP (Gross National
Product). The aggregate economic activity is at the lowest, causing a decline in prices and
profits until the economy reaches its Trough (low point).
4. Recovery Phase
The turning point from depression to expansion is termed as Recovery or Revival Phase.
During the period of revival or recovery, there are expansions and rise in economic
activities. When demand starts rising, production increases and this causes an increase in
investment. There is a steady rise in output, income, employment, prices and profits. The
businessmen gain confidence and become optimistic (Positive). This increases
investments. The stimulation of investment brings about the revival or recovery of the
economy. The banks expand credit, business expansion takes place and stock markets are
activated. There is an increase in employment, production, income and aggregate
demand, prices and profits start rising, and business expands. Revival slowly emerges
into prosperity, and the business cycle is repeated.
Thus we see that, during the expansionary or prosperity phase, there is inflation and
during the contraction or depression phase, there is a deflation

CAUSES OF BUSINESS CYCLE


During the last several hundred years philosophers, economists, stock brokers and men in
the street have tried to give various causes of business cycle, some attribute them to
monetary and non-monetary factors while others to psychological factors. Samuelson
attributes business cycle to external and internal factors which are explained below.

1. Interest rates
Changes in the interest rate affect consumer spending and economic growth For example,
if the interest rate is cut, this reduces borrowing costs and therefore increases disposable
income for consumers. This leads to higher spending and economic growth. However, if
the Central Bank increase interest rates to reduce inflation, this will tend to reduce
consumer spending and investment, leading to an economic downturn and recession.

2. Changes in house prices


A rise in house prices creates a wealth effect and leads to higher consumer spending. A
fall in house prices causes lower consumer spending and bank losses. In the late 1980s,
the boom in house prices caused an economic boom. The drop in house prices in early
1990s caused the recession of 1991-92
3. Consumer and business confidence
People are easily influenced by external events. If there is a succession of bad economic
news, this tends to discourage people from spending and investing making a small
downturn into a bigger recession. But, when the economy recovers this can cause a
positive bandwagon effect. Economic growth, encourages consumers to borrow and
banks to lend. This causes higher economic growth. Confidence is an important factor in
causing the business cycle.
4. Multiplier effect
The multiplier effect states that a fall in injections may cause a bigger final fall in real
GDP. For example, if the government cut public investment, there would be fall in
aggregate demand and a rise in unemployment. However, those who lost their jobs would
also spend less, leading to even lower demand in the economy. Alternatively, an injection
could have a positive multiplier effect.
5. Accelerator effect
This states that investment depends on the rate of change of economic growth. If the
growth rate falls, firms reduce investment because they dont expect output to rise as
quickly. This theory suggests investment is quite volatile and small changes in the rate of
growth have a big effect on investment levels.
6. Inventory cycle
Some argue that there is a natural inventory cycle. For example, there are some luxury
goods we buy every five years or so. When the economy is doing well, people buy these
luxury items causing faster economic growth. But, in a downturn, people delay buying
luxury goods and so we get a bigger economic downturn.

RECESSION OF 2008
Our economy is shrinking, unemployment rolls are growing, businesses and families
cant get credit and small businesses cant secure the loans they need to create jobs and
get their products to market,Barack H. Obama said.
The global financial crisis of 2007 has cast its long shadow on the economic fortunes of
many countries, resulting in what has often been called the Great Recession.1 What
started as seemingly isolated turbulence in the sub-prime segment of the US housing
market mutated into a full blown recession by the end of 2007. The old proverbial truth
that the rest of the world sneezes when the US catches a cold appeared to be vindicated as
systemically important economies in the European Union and Japan went collectively
into recession by mid-2008. Overall, 2009 was the first year since World War II that the
world was in recession, a calamitous turn around on the boom years of 2002-2007.
It is not surprising that, for much of 2008, the severity of this global downturn was
underestimated. Subsequently, leading forecasters, including the IMF and World Bank,
made a number of revisions to its growth forecasts during 2008 and into 2009 as the
magnitude of the crisis grew.2 Of course, there were some voices that issued dire
warnings of a brewing storm, but they were not enough to catch the attention of many
who were lulled into a collective sense of complacency in the years leading up to the
crisis. Some policymakers, after being caught by surprise at the seemingly sudden
appearance of a global downturn, confidently noted that nobody could have predicted the
crisis.
The warning signs of recession were there: large current deficits in the US, UK and other
advanced economies that were being financed by the excess savings of emerging
economies and oil exporters (the global current account imbalance); loose monetary
policy (most notably in the US in the wake of the mild recession of 2001); the search for
yield and misperception of risk; and lax financial regulation.

Determined to avoid mistakes made by policymakers during previous crises,


governments in both advanced and developing countries reacted aggressively by injecting
massive amounts of credit into financial markets and nationalizing banks, slashing
interest rates, and increasing discretionary spending through fiscal stimulus packages.
This response helped avoid a catastrophic depression in many countries though the
effectiveness of policies has varied depending on the magnitude of the response and
vulnerabilities of the domestic economy.
However, despite these interventions, the global financial crisis quickly evolved into a
global jobs crisis, as the crisis-induced credit crunch strangled the real economy and trade
flows collapsed. Unemployment in OECD countries has surged, while in countries
without social security schemes, the downturn has threatened to push millions into
poverty.
Many but by no means all developing and emerging economies felt the deleterious
effects of the US recession by the end of 2008. The typical outcome was a growth
deceleration (ranging from mild to major) in many parts of the developing world, but
there were cases of outright recessions too. Hard-hit countries include Armenia, Mexico,
South Africa, Turkey, the Baltic States, and Ukraine. At the same time, the two most
successful globalizers of recent times have avoided a major downturn, which has been
crucial for kick-starting the recovery in 2009. China has, in particular, managed to keep
their economy growing in 2009 at a rate of 8.7 per cent, which was supported by the
massive stimulus package put together by the Chinese authorities (amounting to US$585
billion). With a smaller stimulus, the Indian economy has also proven to be resilient
thanks to strong domestic demand, with growth only falling to 6.7 per cent in 2009.

IMPACT OF RECESSION 2008 ON INDIA


The old saying History doesnt always repeat itself, but often rhymes, is based more on
fact than fiction. Its been a lot of time we hear of Recession going on in US market.
Everyone is talking about recession. We cling to newspapers, television news channels,
and financial reports only to discover what next in recession. It would be nave to
imagine that a recession in the United States would have no impact on India. The United
States accounts for one-fourth of the world GDP. The fears of a US recession led to panic

in the Indian stock market. The effect on the recession 2008 on India was quite distinct
from those of the past.
Here are some worth following:
1) In terms of specific sectors, the IT Enabled Services sector may be hit since a majority
of Indian IT firms derive 75% or more of their revenues from the United States--a classic
case of having put all eggs in one basket. If Fortune 500 companies slash their IT
budgets, Indian firms could be adversely affected. Instead of looking at the scenario as a
threat, the sector would do well to focus on product innovation (as opposed to merely
providing services).
2) During the 2008-2009, the growth in exports was robust till August 2008.however, in
September 2008, export growth evinced a sharp dip and turned negative in October 2008
and remained negative till the end of the financial year, for the first time in seven years,
exports have declined in absolute terms in October 2008. A decelerating export growth
has implications for India, even though our economy is far more domestically driven than
those of the East Asia. Still, the contribution of merchandise exports to GDP has risen
steadily over the past six years from about 10% of GDP in 2002-03, to nearly 17% by
2007-08. If one includes service exports, the ratio goes up further. Therefore, any
downturn in the global economy will hurt India. There also seems to be a positive
correlation between growth in exports and the countrys GDP. For instance, when
between 1996 and 2002 the average growth rate in exports was less than 10%, the GDP
growth also averaged below 6%. A slowdown in export growth also has other
implications for the economy. Close to 50% of Indias exports textiles, garments, gems
and jewellery, leather and so on originate from the labor-intensive small- and mediumenterprises. Indian Streams Research Journal Vol - I , ISSUE - VII [ August 2011 ] :
Economics ISSN:-2230-7850 A sharp fall in export growth could mean job losses in this
sector. This would necessitate government intervention. A silver lining here, however, is
the global slowdown will also lower cost of imports significantly, thereby easing
pressures on the balance of payment. The impact of oil and other commodity prices,
halving over the past few months, will reflect in the import data for the second half of
2008-09. Oil import bill, earlier projected to cross $100 billion in 2008-09 with prices
surging to $140 per barrel, could easily shrink by about $20 billion. The fall in imports

may exceed the decline in exports in the latter half of 2008-09. This would also help
soften the current account deficit.
3) Employment is worst affected during any financial crisis. So is true with the current
global meltdown. This recession has adversely affected the service industry of Indian
mainly the BPO KPO, IT Companies etc. According to a sample survey by the commerce
ministry 109,513 people lost their jobs between August and October 2008, in export
related companies in several sectors primarily textiles, leather, engineering, gems and
jewelry, handicraft and food processing. Economic Survey of India gives alarming bell
about the on-going effects of the global slowdown on employment and has pressed upon
the government the urgency of the major response, especially in the unorganized sector.
4. The manufacturing sector has to ramp up scale economies, and improve productivity
and operational efficiency, thus lowering prices, if it wishes to offset the loss of revenue
from a possible US recession. The demand for appliances, consumer electronics, apparel,
and a host of products is huge and can be exploited to advantage by adopting appropriate
pricing strategies. Although unlikely, a prolonged recession might see the emergence of
new regional groupings--India, China, and Korea?
5) The tourism sector was affected. Now is the time to aggressively promote health
tourism. Given the availability of talented professionals, and with a distinct cost
advantage, India can be the destination of choice for health tourism.
6) Recession Agriculture Indian agriculture has not impacted by global economy crises,
except some export oriented crops. About 60-65% of Indias population and workforce
depend on agriculture. Countrys agriculture sector will save the India from the huge
impact of the global economic recession. Right now agriculture is the key for Indian
Indian Streams Research Journal Vol - I , ISSUE - VII [ August 2011 ] : Economics
ISSN:-2230-7850 growth is this difficult time. Agriculture is an absolute necessary,
producing the basic human needs food and clothing and exciting reason is Bio fuels .An
Investment in agriculture is considered as a conservation and tangible Investment with
consistent returns. Agriculture is the best solutions to maintain economic growth this
year. Even in down markets agriculture companies performed very well in 2008 and will

do the same in 2009. I wish that the agriculture sector will continue to provide support to
our economy.
7). The Indian Rupee has appreciated in relation to the US dollar. Exporters are pushing
for government intervention and rate cuts. What is conveniently forgotten in this debate is
that a stronger Rupee would reduce the import bill, and narrow the overall trade deficit.
The Indian central bank (Reserve Bank of India) can intervene anytime and cut interest
rates, increasing liquidity in the economy, and catalyzing domestic demand. A strong
domestic demand would also help in competing globally when the recession is over.

The following measures can be adopted to tackle the recession:

Tax cuts are generally the first step any government takes during slump.
Government should hike its spending to create more jobs and boost the

manufacturing sectors in the country.


Government should try to increase the export against the initial export.
The way out for builders is to reduce the unrealistic prices of property to bring back

the buyers into the market.


And thus raise finances for the incomplete projects that they are developing.
The falling rupees against the dollar will bring a boost in the export industry. Though

the buyers in the west might become scarce.


The oil prices decline will also have a positive impact on the importers.
CONCLUSION

In summary, at the macro-level, a recession in the US may bring down GDP growth, but
not by much. At the micro-level, specific sectors could be affected. Innovation now may
prove to be the engine for growth when the next boom occurs. For US firms, who have
long looked at China as a better investment destination, this may be a good time to look
at India as well. After all, 350 million people with purchasing power cannot be ignored.
This is not a sales pitch for India, but only a gentle suggestion to US corporations.

BIBLIOGRAPHY

Reading material, chapter-business cycle, page no. 76


Global Recession and Its Impact on Indian Financial Markets; Nidhi Choudhari

Manager Bank of India, Kolkata.Article.


Home page of NATIONAL BUREAU OF ECONOMIC RESEARCH

http://www.nber.org/cycles/main.html
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