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BUSINESS CYCLE

By:Yerra subbarayudu

DEFINITION
• The term business cycle or trade cycle refers to economy-wide fluctuations in production or economic activity over several months or years.

• These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth (anexpansion or boom), and periods of relative stagnation or decline (a contraction or recession).

CHARACTERSTICS
• Cyclical fluctuations are wave like shifts • Fluctuations are recurring in nature • They are non-periodic or uneven. In other words the

peaks and channel do not occur at usual intervals.
• Business cycles are not seasonal variations such as upswings in retail trade during festive seasons.

• Upswings and downswings are collective in their effects.

NEED OF UNDERSTANDING B.C
• B.C gives insights the economy and also the market impact correctly. • B.C helps understanding Variations in investment

spending (explain : Investment spending is considered
the most volatile component of the aggregate or total demand) • Variations in government spending are yet another source of business fluctuations.

• It gives the breif idea about fluctuations in exports and imports and to decision making accordingly.

• Understanding b.c ensure that establishments with a
minimum of uncertainty and damage. • B.C strengths and encourages it to plan with greater discretion • Helps to Attention to Customers—This can be an

especially important factor for businesses seeking to
emerge from an economic downturn.

PHASES OF B.C
The Four Phases of Business Cycle are :• • • • Prosperity or boom phase Recession phase Depression phase Recovery phase

Business cycle phases

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. • 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 ofeconomic 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.

THE FEATURES OF PROSPERITY PHASE
• • • • • • • • High level of output and trade. High level of effective demand. High level of income and employment. Rising interest rates. Inflation. Large expansion of bank credit. Overall business optimism. A high level of MEC (Marginal efficiency of capital) and investment.

RECESSION PHASE
• A period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market. A recession is generally considered less severe than a depression, and if a recession continues long enough it is often then classified as a depression. There is no one obvious cause of a recession, although overall blame generally falls on the federal leadership, often either the President himself, the head of the Federal Reserve, or the entire administration.

GLOBAL RECESSION
• There is no commonly accepted definition of a global recession, although the International Monetary Fund (IMF) regards periods when global growth is less than 3% to be global recessions. During what the IMF terms the past three global recessions of the last three decades, global per capita output growth was zero or negative

• In economics, a recession is a business cycle contraction, a general slowdown in economic activity. Macroeconomic indicators such as GDP, employment, investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. • Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

2008–2012 GLOBAL RECESSION
• The 2008–2012 global recession, sometimes referred to as the late-2000s recession, the Great Recession is a marked global economic decline that began in December 2007 and took a particularly sharp downward turn in September 2008. The global recession affected the entire world economy, with higher detriment in some countries than others. It is a major global recession characterized by various systemic imbalances and was sparked by the outbreak of the Financial crisis of 2007–2008.

• A global recession has resulted in a sharp drop in international trade, rising unemployment and slumping commodity prices. In December 2008, the National Bureau of Economic Research (NBER) declared that the United States had been in recession since December 2007. Several economists predicted that recovery might not appear until 2011 and that the recession would be the worst since the Great Depression of the 1930s. The conditions leading up to the crisis, characterized by an exorbitant rise in asset prices and associated boom in economic demand, are considered a result of the extended period of easily available credit and inadequate regulation and oversight

CAUSES OF THE 2008–2012 GLOBAL RECESSION
• • • • Oil prices Emigration Monetary expansion Overproduction

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.

• 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).

THE FEATURES OF DEPRESSION PHASE
• • • • • • • • Fall in volume of output and trade. Fall in income and rise in unemployment. Decline in consumption and demand. Fall in interest rate. Deflation. Contraction of bank credit. Overall business pessimism. Fall in MEC (Marginal efficiency of capital) and investment.

U.S UNEMPLOYMENT, FARM PRICES & MANUFACTURING OUT PUT

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). The banks expand credit, business expansion takes place and stock markets are activated.

 This phase is gradual. It starts when the price stops falling.

 This is said to start when the piled up stock is
exhausted.  the producers start planning for production.  This generates employment and income, which again leads to demand for consumer goods.

 This leads to correction of price.

• The profit starts replacing looses and recovery gathers
momentum. • Rising price encourages companies towards new investment and projects. • This phase of recovery takes the economy to the phase of prosperity. Thus, the cycle is again ready to repeat itself.

SOURCES
• http://www.investopedia.com/terms/b/businesscycle.asp #axzz2DQaYQBub • http://kalyan-city.blogspot.in/2011/06/4-phases-ofbusiness-cycle-in-economics.html • http://seekingalpha.com/article/824281-understandingthe-business-cycle-the-key-to-investor-success • http://www.tutorsonnet.com/homework_help/macro_eco nomics/monetary_theory/business_cycles_assignment_h elp_online_tutoring.htm • http://en.wikipedia.org/wiki/Business_cycle#Classificati on_by_periods • http://en.wikipedia.org/wiki/Great_Depression

Thank Q