BUSINESS CYCLE PROF.

KARAN BHATT
DEFINITION
The business cycle refers to the alternating phases of economic growth and decline.
A business cycle is the repetitive economic changes that take place in a country over
a period. It is identified through the variations in the GDP along with other
macroeconomics indexes.
A business cycle is the natural expansion and contraction of economic growth that
happens in an economy over a period of time.
The rise and fall of an economy's gross domestic product (GDP) defines the start and
end of a business cycle, which is also known as an economic cycle or a trade cycle.
A business cycle accounts for the growth and decline of economic activity over time.
SIGNIFICANCE
Help Frame Appropriate Policies
A business cycle will affect all the sectors of an economy.
Similarly, it will also affect all sectors of a firm as well.
Right from demand to supply to the cost of production every aspect will depend on
the phase of the business cycle.
So the firm must be able to correctly identify its current phase. This will help them
frame appropriate business and trade policies.
For example, if the firm is going through expansion it will be the correct time for
aggressive investment policies or an expansion in the workforce.
SIGNIFICANCE
Greatly Affect Cyclic Businesses
Changes in the economy affect all firms but not uniformly. There are certain
businesses that are more vulnerable to a change in the phase of a trade cycle.
Such firms have to keep a very close look at the changes in the economy at all
times. Some examples are the fashion industry, electronics industry, food and
beverage industry, real estate industry etc.
For such firms when the economy is in a boom, they must capitalize. Because a
depression in the economy will affect them the most. So this is one of the main
importance of business cycles.
SIGNIFICANCE
Strategic Business Decisions
The business cycle of a firm will also have a huge impact on their business decisions.
Managers and entrepreneurs take strategic business decisions based on the phases of the trade
cycle.
A business cannot be stagnant it must constantly keep updating to stay with the times. So
different phases of the cycle demand different actions from the firm.
So if the economy is going through an expansion the management can make the strategic
decision to expand the business or increase their output levels.
But if the firm is in a trough then spending must be reined in and policies should be formed
accordingly.
Management may even decide to shut down some product lines temporarily or even
permanently. Such important business decisions will depend on the trade cycle.
SIGNIFICANCE
Entry and Exit from Market
For the success of a product launch, the phase of the trade cycle for its introduction
is a very important factor.
It is much harder for a new product to survive a sluggish economy that is moving
towards a depression.
Even the prices, sales policy, promotions of the new product will depend on the
phases of the business cycle.
And on the other hand, if a product has to exit the market, again the conditions must
be studied.
If the economy is coming out of a depression and seeing a revival then perhaps the
exit can be delayed. This is another importance of business cycles.
STAGES OF BUSINESS CYCLE
Expansion
A business cycle always starts with the
expansion stage.
During this stage, there are clear positive
economic indicators, including growth in
income, employment, demand, supply and
profit.
Throughout an expansion, the frequency of
investments from private and public entities
increases, and both businesses and individuals
generally repay their debts on time.
Peak
When the economy becomes saturated and
upward growth can no longer continue, the
business cycle enters the peak stage.
Wages, employment rates and prices for
goods and services are as high as they can go,
given the current economic conditions.
At this point, these economic indicators cease
to rise further. Many businesses and
individuals may reexamine their budgets in
anticipation of a decline in economic activity.
STAGES OF BUSINESS CYCLE
Recession Depression
The recession stage starts as soon as The depression stage begins once the GDP
expansion ends and economic activity begins falls below the pre-expansion level or the
to decline. steady growth line.
It lasts until the GDP returns to the point that During a depression, unemployment rates rise
marked the beginning of the expansion stage. dramatically, while economic growth declines
steadily.
During a recession, demand begins to decline
almost immediately, but producers fail to A depression lasts until economic activity
adjust their output until the market has excess can't decrease in value any further or outside
supply. investment occurs that stimulates the
economy.
Positive economic indicators like prices and
wages start to fall at this point.
STAGES OF BUSINESS CYCLE
Trough Recovery
When the depression stage reaches its lowest point, a After the GDP reaches its lowest point in the cycle,
business cycle enters the trough stage. the recovery stage commences.
At this point, the economy experiences negative During this stage, the economy begins to recover and
economic growth, as the production of goods and reverse the negative trends.
services decreases and wages reach their lowest point.
Demand increases and supply soon follows.
Regardless of the severity of a business cycle, the Eventually, investments resume, and employment and
trough is always the lowest point in relation to production begin to rise. The recovery stage lasts until
economic growth. the GDP returns to a steady growth line.
Once it reaches this point, the current business cycle
ends and a new one begins as it enters the expansion
stage again.