BUSINESS CYCLE

A study of fluctuations in business activity (output , income, prices, profits, employment )

Characteristic features
It occurs periodically It is international in character It is wave like The process is cumulative The cycles will be similar but not identical

Phases of business cycle

Depression Crisis Revival Prosperity Peak Recession

Business cycle
peak Recession Boom / Prosperity Revival

Depression

Crisis

Depression
The level of economic activity is extremely low Low income, production, employment prices, profits Low prices leads to low profit, low wages, people suffer, closing down of business

Recovery
Slow increase in output, employment, income and price. Increase in demand, investment, bank loans and advances. This leads to recovery, revival, prosperity

Prosperity
Increase in income, employment, no wastage. Increase in wages, prices, profits and interest. Increase in demand for loans, scarcity of labour, raw material and other factors of production. That leads to recession

Recession
Reduction in investment, employment and production. Reduction in income, expenditure, prices and profits. Reduction in bank loans. The business expansion stops That leads to depression

Theories
Sunspot theory / climate theory Psychological theory Monetary theory Over-investment theory Over-savings / under consumption theory Innovation theory

NATIONAL INCOME
The national income committee of India has given a simple definition: National income estimate measures the volume of commodities and services turned out during a given period counted without duplication.

Concepts
GNP (Gross National Product) NNP (Net National Product) Personal income Disposable personal income Real income

GNP
The sum of market value of all final goods and services produced in a country during a specific period of time generally one year. GNP at factor cost: The sum of all factor payments (wages, interest, rent, profits and depreciation)

GNP = market value of domestically produced goods and services + incomes earned by the residents of a country in foreign countries incomes earned by the foreigners in the country. The total value of final goods and services produced by the residents of a country during a given period of time, including net income from abroad.

GNP = Domestic product imports + exports. Final goods alone to avoid double counting Goods and services rendered free of charges should not be included Transfer payments not included Capital gains are not included Income earned through illegal activities

Methods of measuring GNP

Output method / production method Income method Expenditure method

GDP
Includes the income locally earned by the non nationals and excludes the incomes received by the resident nationals from abroad. GDP = market value of goods and services produced by the residents in the country + incomes earned locally by foreigners incomes received by the nationals from abroad.

GDP Growth rate

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 7.3 % 7.8 4.8 6.5 6.1 4.4 5.8 3.8 8.5 7.5 - 8.1

NNP
NNP = GNP Depreciation NNP is national income available for consumption and net investment to the society. PCI = NNP / Popln.

Personal income
The sum of all kinds of incomes received by the individuals from all sources of incomes. Actual income received by the individuals and households in the country from all sources. Peoples contribution to the society should be deducted. PI = NI corporate income taxes undistributed profits social security contribution and transfer payment.

Disposable personal income

All PI is not at their disposal. DPI = PI personal direct taxes.

Factors determining NI
Quantity Quality Technology know-how Political stability

Difficulties
Any income earned abroad have to be included To avoid double counting value added method/ nature of goods should be considered Services rendered free of charges are not included

Capital gains, transfer payments are not included Changes in price level will also affect the calculation Value of services rendered by military

Problems in measuring
Non monetized sector Illiteracy Lack of occupational specification Un organized productive activities Lack of adequate statistical data

Uses of national income statistics

To frame economic policies Gives an idea of the structure of the economy For inter sectoral growth Inter class income distribution For international composition of standard of living

It indicates the growth of the economy Distribution of income

National income and managers

Marketing manager Financial manager Consumer banking manager Advertising manager Production manager