BUSINESS ECONOMICS

MEANING LIST

CHAPTER 6- Business Cycles

1. What is Business Cycle

• Rhythmic fluctuations in aggregate economic activity that an economyexperiences over a period of
time are called business cycles or trade cycles or Economic cycle
• Business cycle refers to alternate expansion and contraction of overallbusiness activity.
• The Business Cycle is the periodic fluctuations in economic activitymeasured by the change in real
GDP
• Peak and trough are the Turning points of Business Cycle

2. What are the 4 phases of Business cycles

A typical business cycle has four distinct phases. These are:
1) Expansion (also called Boom or Upswing)
2) Peak or Boom or Prosperity
3) Contraction (also called Downswing or Recession)
4) Trough or Depression
3. What is Expansion / Boom/ Upswing
• Increase in national output, employment, aggregate demand in capital and consumer
expenditure, sales, profit, stock prices and bank credit.
• Full employment of resources (involuntary unemployment = 0).
• Increasing prosperity and high standard of living.
• Business confidence /Profits and Factor income also increases
• Only Structural unemployment and Frictional unemployment can beseen
• Growth ultimately slows down reaches peak

4. What is Peak / Boom / Prosperity

o Increase in input prices
o Increase in output prices
o Increased cost of living
o Actual demand stagnates
o Highest stage in business cycle
o Economy becomes overheated and unsustainable
o Highest GDP and Employment

5. What is Contraction / Recession

• Decrease in levels of investment and employment
• Decrease in input prices – Decrease in wage and interest
• Decrease in aggregate demand – Decrease in prices
• Decrease in cost: Decrease in profit expectations (pessimism)
• Decrease in bank credit; stock prices fall
• Income of wage and interest earners gradually declines
• Excess production capacity during Contraction
 6. What is Trough / Depression
a. Depression = severe form of recession
b. Negative growth rate
c. Decrease in level of National Income
d. Expenditure declines rapidly
e. Cost decreases – prices are at their lowest
f. Firms’ shutdown
g. Highest level of unemployment
h. Decrease in interest rate – people’s demand for holding liquid money (cash)
increases
i. Decrease in demand for credit – fall in investors’ confidence
j. Banking / financial crisis
k. Excess capacity in capital and consumer durable goods industry
l. Large number of bankruptcies and liquidation
m. Decrease in trade and commerce

7. What is Recovery
a. Business confidence takes off (end of Pessimism and start of optimism)
b. Increase in income; increase in employment; aggregate demandincreases; price increases; cost
increases; banks expand credit

Examples of Business Cycle:

• Great Depression of 1930
• Information Technology bubble burst of 2000
• Global Economic Crisis(2008-09)

8. What is Leading Indicator

A leading indicator is a measurable economic factor that changes beforethe economy starts to
follow a particular pattern or trend. These variables change before the real output changes. For
example, changes in stock prices, profit margins and profits, indices such as housing, interest
rates and prices are generally seen as precursors of upturns or downturns.

9. What is Lagging Indicator

Lagging indicators reflect the economy’s historical performance and changes in these
indicators are observable only after an economic trendor pattern has already occurred. These
variables change after the real output changes. Some examples of lagging indicators are
unemployment, corporate profits, interest rates, the consumer price index and commercial
lending activity.

10. What is Coinincident Indicator/ Concurrent Indicator

Coincident economic indicators, also called concurrent indicators, coincide or occurs
simultaneously with the business-cycle movements. Some examples are Gross Domestic
Product, industrial production, inflation, personal income, retail sales and financial market
trends suchas stock market prices.