 Overtime all economies grow, some slowly while

others rapidly.

 This growth is however not a smooth pattern. It

is characterized by ups and downs in economic
activity.
 These upswings and downswings in output,
employment and other economic variables are
called business cycles

 The sources of business cycles may be found

within the functioning of the economy itself, i.e.,
endogenous or may come from external forces
like war etc., i.e., exogenous
 Theterm “business cycle” (or economic cycle or
boom-bust cycle) refers to economy-wide fluctuations
in production, trade, and general economic activity
 From a conceptual perspective, the business cycle is
the upward and downward movements of levels of
GDP and refers to the period of expansions and
contractions in the level of economic activities
(business fluctuations) around a long-term growth
trend.
 Varying amplitude and length
 Cyclical fluctuations
 Contagious
 Unpredictable
 Broadly, a business cycle has four phases or
stages:

 EXPANSION or PROSPERITY
 RECESSION or CRISIS
 DEPRESSION
 RECOVERY

 PEAKS and TROUGHS mark the turning points of

the cycle
 EXPANSION
Or
PROSPERITY
CHARACTERISTICS:
 High levels of investment and consumption demand

 High levels of output, incomes and employment

 A high level of MEC and business optimism

 Expanding bank credit and flourishing trade

 Rising trend in interest rates, wages and
salaries, and prices

 Bullish stock markets and real estate

 High living standards

 Full capacity utilization

 once the peak is reached,
 Creation of relative scarcity
 Upward pressure on input and factor prices
 Falling profit margins and change in people’s
sentiments
 Declining marginal efficiency of capital and
investment demand
RECESSION
CHARACTERISTICS:
 contractions in most sectors of the economy
 steep decline in investment
 reduced output and incomes
 employment witnesses a significant fall
DEPRESSION
 CHARACTERISTICS:

 Extremely low levels of output, incomes and

employment
 Negative growth rates in the economy
 Negligible fresh investment, if any
 Falling consumption demand and trade volumes,
stock accumulation
 Low level of MEC and business pessimism
 Minimal demand for bank credit and increasing
bankruptcies
 Falling trend in interest rates and prices
 Bearish stock markets and real estate
 Low standards of living
 Under utilization of capacity and under
employment
RECOVERY
 Characteristics:

 Economy undergoes changes from depression to

prosperity
 Improvement in demand
 Induced investment
 Improvement in employment, output, income
PSYCHOLOGICAL THEORY

MONETARY THEORY

INNOVATION THEORY

COBWEB THEORY

SAMUELSON THEORY

HICKS THEORY
MONETARY
THEORY
 Monetary phenomenon

 take into consideration the monetary and credit

system of an economy

 According to Hawtrey, non monetary factors like

strike, floods, earthquakes, droughts etc. may at
best cause a partial depression but not a general
depression
 GROWTH PHASE:

 Banks increase credit facilities

 Reduced lending rate of interest
 Encouraged borrowings for investment
 Higher demand and income created
 BOOM PHASE:
 Further increase in demand, production, income
 According to Hawtrey, “increased activity means
increased demand and increased demand means
increased activity. A vicious circle is set up, a
cumulative expansion of productive activity
 With the continuation of cumulative expansion
process, producers quote higher and higher
prices

 Induced borrowings

 Optimism encourages borrowing, borrowing

increases sales and sales raise optimism
 RECESSION PHASE

 According to Hawtrey, “prosperity cannot continue

limitlessly. It comes to an end when banks stop
credit expansion.”
 Banks raise interest rates and refuse to lend
 Repayment of loans
 Falling stocks and orders
 SLUMP PHASE

 According to Hawtrey, “as depression continues,

traders repay bank loans by selling their stocks
at whatever prices they can”
 Liquidation of firms
 Money flows into reserves of banks and bank
funds increase
 Ignores non monetary factors

 Considers sensitivity of business decisions based

only based on credit
INNOVATION
THEORY
 The Schumpeter’s theory of innovation advocates
that business innovations are responsible for
rapid changes in investment and business
fluctuations.

 “Business cycles are almost exclusively the result

of innovations in the industrial and commercial
organization.”
 INNOVATION:

 changes in methods of production and

transportation
 changes in industrial organization
 changes in the production of a new article
 opening of a new market
 opening of new sources of material
EXPANSION PHASE:
 In industrial history of the world most significant
booms have been characterized by revolutionary
changes in form of innovations.
 implementations lead to an immediate increased
demand for construction and investment goods
 Increased borrowing from banks
 pioneer firms enjoy a sort of monopoly profits for
sometime
RECESSION PHASE:

 Over-investment often results as the firms race to

reap high profits

 The resulting increases in output and

employment are further carried forward due to
increases in incomes, demand and so on
 too many entrepreneurs copy the innovations of
the pioneer firms, the competitive behaviour
forces profits to go down

 rising costs and inefficiencies would eventually

creep in
 DEPRESSION PHASE:

 under-savings and unequal income distribution

during boom periods lead to fall in investment and
output, and a depression begins

 unprofitable firms are gradually wiped out from the

market

 Business sentiment is adversely affected.

 RECOVERY PHASE:

 New innovations will pave the way for another

boom
 Innovation cannot be the sole cause of business
cycle. Some innovation is required almost at
every point of time

 Banks are not the only source of finance

 Many a times profit are ploughed back to finance

innovation
THANK
YOU