Business Cycles

The business cycle is the upward and downward movement

of economic activity that occurs around the growth trend.

It also refers to economy-wide fluctuations in

production or economic activity over several months or
years.
 oProsperity Phase
Level of real output

oRecession Phase

oDepression Phase

oRecovery Phase
Time
Level of real output

Therefore,
Unemployment is low
and inflation may be
high.

Time

1. Prosperity Phase

When there is an expansion of income,

employment, prices and profits,
there is also a rise in the standard of living.
This period is termed as Prosperity phase.
 1. The turning point from prosperity to depression is termed as
Recession Phase.
2. During a recession period, the economic activities slow
down.
3. The businessmen lose confidence and become
pessimistic (Negative). It reduces investment.

4. Expansion of business stops and stock market falls.

5. Orders are cancelled and people start losing their jobs.

6. The increase in unemployment causes a sharp decline in

income.
Decrease in investment since 2010-2011
 The features of depression
are :-
Level of real output

1. Fall in income and rise in

unemployment.

2. Decline in consumption and

demand.
Time

3. Fall in interest rate.

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 recovery are :-

1. There are expansions and rise in

Level of real output

economic activities

2. Demand starts rising, production

increases and this causes an
increase in investment.

3. There is an increase in Time

employment,
and profits start rising.

The turning point from depression to expansion is

termed as Recovery or Revival Phase.
 Politically-based business
cycle

When an administration of any hue is elected, it initially

adopts a contractionary policy to reduce inflation and
gain a reputation for economic competence.

It simultaneously leads to low inflation and

unemployment on election day
 During the period of boom, decrease in public expenditures,
increase in taxes and increase in public debt. On the other hand,
1. Fiscal Measures:during the period of depression, the policy of increase in public
expenditures, decrease in taxes and decrease in public debt is
adopted by the government.

Monetary measures mean that control of money and credit

2. Monetary Measures: supply in the country. When we are facing boom or inflation,
the central bank reduces the total quantity of money in
circulation.
On the other hand, incase of depression, the central bank
can increase the quantity of money by lowering the bank
rate

Today every country has trade relation with other countries.

3. International measures:
If there is inflation or deflation in one country, it can be easily
be carried to top other countries, in this way business cycle is
tackled on internatinal level