Business Cycle by Dr. N.Moogana Goud

8/9/2019 Business Cycle by Dr. N.Moogana Goud

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BUSINESS CYCLES(TRADE CYCLES)

Dr.N.Moogana Goud

Prof and Director (MBA Programme)

SJC Institute of TechnologyCHICKBALLAPUR



Business cycle A business cycle is a sequence of economic activityin a nation's economy that is typically characterized byfour phases²recession, recovery, growth, anddecline²that repeat themselves over time.

The business cycle is a long-term pattern of changesin Gross Domestic Product (GDP) that follows four stages: expansion, prosperity, contraction, andrecession. After a recessionary phase, theexpansionary phase can start again.

The phases of the business cycle are characterized

by changing employment, industrial productivity, andinterest rates. Some economists believe that stock pricetrends precede business cycle stages.



Business cycle

The business cycle affects employees, employers andinvestors. For example:

The economy is strong, people are employed andmaking money. Demand for goods -- food, consumer appliances, electronics, services -- increases to thepoint where it outstrips supply. This demand fuels arise in prices, or inflation.

As prices increase, people ask for higher wages.Higher employment costs translate into higher pricesfor goods, fueling an upward spiral effect.

When prices get too high, consumers decide goodsare too expensive and demand decreases. Whendemand decreases, companies lay off workersbecause they don't need to make as many goods or provide as much service.



Business cycle

Decreasing demand fuels declining prices, whichmeans the economy is in a recession.

Lower prices spur demand. As demand picks up,people begin buying again, fueling the need for greater supply. And the cycle goes back to the beginning.

CHARACTERISTICS OF BUSINESS CYCLES1. Recurring fluctuations: which occurs periodically in

free rhythm.

2. Period of business cycle is more than one year : atypical BC complete itself in a period of three to four

years. in any case the period of BC is not shorter thanone year.

3. Presence of the alternating forces of expansion andcontraction: the forces leading an economy toprosperity and depression.



Business cycle

4. Phenomenon of crisis: According to Keynes, an important characteristics of

the BC is the Phenomenon of crisis. This implies thatthe peak and the trough are asymmetrical.



Phases of Business Cycle According to Burns and Mitchell, every business cycle

has the critical mark of points of peak and trough(Depression). From trough to peak there is theexpansion phase and peak to trough the contractionphase.

Apart from these two longer phases there are two other phases charectrised by the turning points.

The upper turning point located at the peak marks thebeginning of the recession, while

The lower turning point located at the trough is thevenue of revival



Phases of Business Cycle




According to Burns and Mitchell, the four distinct

and closely related phases of business cycles are

as follows,Revival

Expansion

Recession

Contraction




Joseph Schumpeter does not agree with Burns andMitchell on the phases of the BC.

In his opinion, peaks and troughs of a cycle cannot be

regarded as the critical mark-off points According to Joseph Schumpeter, the critical mark-off

points are ³ neighborhoods of equilibrium´ which arelocated at or near the points of inflection

In Joseph Schumpeter model

1. upper half of the BC is divided into two parts ±prosperity and recession

2. lower half of the BC from similarly consists of twophases ± depression and recovery



Hypothetical Business Cycle

Peak

Peak

Trough

Recession Recovery

Real GDPper year




Peak or prosperity :

The point at which the real GDP stops increasing and

begins its decline; the highest point.

At the top, or peak, of the business cycle, businessexpansion ends its upward climb.

Employment, consumer spending, and production hit their

highest levels.

A peak, like a depression, can last for a short or longperiod of time.

When the peak lasts for a long time, we are in a period of

prosperity.




One of the dangers of peak periods is that of inflation.

During periods of inflation, prices rise and the

value of money declines. Inflation is more of a threat during peak periods

because employment and earnings are at highlevels.

With more money in their pockets, people arewilling to spend more than before.

In this way, demand is increased and pricesrise.




R ecession.

A decline in the real GDP that occurs for at least twoor more quarters.

Recessions feed on themselves. During a recession, business people spend less than

they once did. Because sales are failing, businessesdo what they can to reduce their spending.

They lay off workers, buy less merchandise, and

postpone plans to expand. When this happens, business suppliers do what they

can to protect themselves.

They too lay off workers and reduce spending.




As workers earn less, they spend less, and business

income and profits decline still more.

Businesses spend even less than before and lay off still more workers. The economy continues to slide.




Low Point, or Depression.

State of the economy where there are largeunemployment rates, a decline in annual income, and

overproduction. The time at which the real GDP stops its decline and

starts expanding; the lowest point.

Sooner or later, the recession will reach the bottom of the business cycle.

How long the cycle will remain at this low point variesfrom a matter of weeks to many months.

During some depressions, such as the one in the1930s, the low point has lasted for years




Ex pansion and R ecovery .

A period in which the real GDP grows; recovery froma recession.

When business begins to improve a bit, firms will hirea few more workers and increase their orders of materials from their suppliers.

Increased orders lead other firms to increaseproduction and rehire workers.

More employment leads to more consumer

spending, further business activity, and still more jobs.

Economists describe this upturn in the business cycleas a period of expansion and recovery.



FACTORS THAT SHAPE BUSINESS CYCLES

VOLATILITY OF INVESTMENT SPENDING

-Variations in investment spending is one of theimportant factors in business cycles.

-increases in investment spur a subsequentincrease in aggregate demand, leading to economicexpansion. Decreases in investment have theopposite effect.

TECHNOLOGICAL INNOVATIONS

Technological innovations can have an acute

impact on business cycles. Indeed, technologicalbreakthroughs in communication, transportation,manufacturing, and other operational areas can havea ripple effect throughout an industry or an economy.




VARIATIONS IN INVENTORIES

Variations in inventories²expansion and contraction in thelevel of inventories of goods kept by businesses²also

contribute to business cycles. Inventories are the stocks of goods firms keep on hand to meet demand for their products.

-How do variations in the level of inventories trigger changes in a business cycle?

-Usually, during a business downturn, firms let their inventories decline. As inventories dwindle, businesses

ultimately find themselves short of inventories. As a result,they start increasing inventory levels by producing outputgreater than sales, leading to an economic expansion.




FLUCTUATIONS IN GOVERNMENT SPENDING

Variations in government spending are yet another sourceof business fluctuations. This may appear to be an unlikely

source, as the government is widely considered to be astabilizing force in the economy rather than a source of economic fluctuations or instability.

POLITICALLY GENERATED BUSINESS CYCLES

Many economists have hypothesized that businesscycles are the result of the politically motivated use of

macroeconomic policies (monetary and fiscal policies) thatare designed to serve the interest of politicians running for re-election.




MONETARY POLICIES

Variations in the nation's monetary policies,

independent of changes induced by political

pressures, are an important influence in businesscycles as well. Use of fiscal policy²increased

government spending and/or tax cuts²is the most

common way of boosting aggregate demand, causing

an economic expansion. Moreover, the decisions of

the Federal Reserve, which controls interest rates,can have a dramatic impact on consumer and

investor confidence as well.



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FLUCTUATIONS IN EXPORTS AND IMPORTS

The difference between exports and imports is the

net foreign demand for goods and services, alsocalled net exports. Because net exports are a

component of the aggregate demand in the economy,

variations in exports and imports can lead to

business fluctuations as well.



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Business Cycle by Dr. N.Moogana Goud