Class 5

Business Cycles
Business Cycles
• Business cycles are ups and downs in the economic activities in the economy.
• The graph of business cycles include GDP growth rate on the vertical axis and
time on the horizontal axis.
• The time period can be years or quarters or months.
• A business cycle is explained by five phases:
1. Expansion/Boom
2. Peak
3. Contraction/Recession
4. Trough
5. Recovery
Phases of Business Cycles:
• Expansion/Boom: Phase representing increase in economic activity,
characterized by rising aggregate demand, employment, and income levels.
• Peak: The phase representing the peak growth rate of a business cycle.
• Contraction/Recession: Phase representing decrease in economic activity,
characterized by falling aggregate demand, employment, and income levels.
• Trough: The phase representing the rock bottom in growth rate of a
business cycle.
• Recovery: Phase representing slow and steady economic growth, steady rise
in aggregate demand and steady fall in unemployment as the economy
gradually recovers from the downturn.
 Variable of Economic
Activity
Phases of Business
Cycles

Time
Classical vs. Keynesian Economic School
Classical School of Thought Keynesian School of Thought
Advocates laissez-faire economy or free market Advocates government intervention to stabilize the
economy. The lower the government regulations the economy.
better.
All economic theories that came before the great It began its journey through John Maynard Keynes
depression in the 1930s. after the great depression.
Determines equilibrium from the supply-side analysis. Determines equilibrium from the demand-side
analysis.
Cannot explain the great depression. Prolonged period It can not only explain prolonged economic recessions
of inflation and unemployment. but also shows the way out of such a condition.
Savings and investment are the key drivers of Government can also stimulate economic growth
economic growth. apart from savings and investment.
Keynesian Consumption Function
• Keynes developed an econometric model that explained the relation
between disposable income and consumption expenditure of an
economy.
• The relation can be represented by the following equation:

Here, C is the consumption function,

C0 = autonomous consumption/ fixed consumption
c = marginal propensity to consume
Y = income = C + S
 Annual Business Cycle of Bangladesh
12

10

8
Real GDP growth rate

-2

-4

-6
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Year