5 BUSINESS CYCLE
PEAK
EXPANSIO
NOISSEO3d
RECOVERY
EXPANSION
BEAR MARKET
TROUGH
) BusineSs Cycles
# Expangion:
•Increase in output, employment,
nation
aggvegote demand, Copital & consumes expendituse,
Sales, profits,ising etock poices and bank coedit.
• tate continous till there is full employmen
of tesources and production it ot its maximum
possible level.
•Involuntusy unemployment is almost zero
Poices and costs also tend to oise tuathes,
People enjoy high standard of living.
CA FONDATION
# feak /Boom/ Psos pexity
The tesm peak vefers to the top os the higest point of
the basiness cycle.
•Consumers begin to revjeu theis consumption,expendituon
on housing, dubable gocde etc.
Actual demand stagnates.
# Contaacion / Recessjon / Downsoing:
• These is fall in he levels of investment and emploment
Supply to8 exc eeds demand.
•Pooducers louwes theis poices in oudes to dispose off
theis inventories and meeting theis financial obligations,
Consumer expect fusthes decreases in prices and
post pone their puchases.
• Wage vates fall,
# Trough and epvession
Groouth rodte becomes negative and the level of national
income and ex penditute declines rapidly.
• Poices de ct their lOuwest.
Fall in intereet vte.
Oemand for holding liguid money inc veases.
Industoies espcially capital ond consumer dutqble
goods suffes from excess capacity
#Recoveay:
• The poocess of veveasal is initially felt in labou
masket.
## Indicators
Economists use changes in g vasiehH of
activities to measuge the business cHcle
and to predict where the economu is headed
toward. These aae called indicatoS.
* Leading Indicato5
Io a economic factos that changes
measutrable
before the economy stuats to follow a paaticulas
patten or toend.
Vasiables that change befooe the real output
changes.
Phases of business cycle
Expansion
Peak
Contraction
Trough
Expansion:
The expansion
phase is characterised
Peak:The term
by increase in national
output, employment, peak refers to
aggregate demand, the top or the
capital and consumer highest point
expenditure, sales, of the business
profits, rising stock prices cycle
and bank credit.
Contraction: The
Trough: At
economy cannot
continue togrOw the depth of
depression, all
endlessly. Once peak
is reached, increase economic activities
touch the bottom
indemand is halted
and the phase of
and starts decreasing
incertain sectors. trough is reached
A noteworthy characteristic of these economic fluctuations is
that they are recurrent and occur periodically.
Trend
Real GDP
Trough
Trough
Trough
Time
CAUSES 0F BUSINESS CYCLE
Internal Causes:
Fluctuations in Effective Demand
Fluctuations in Investment
Variations in government spending
Macroeconomic poliies
Money Supply
Psychological factors
External Causes:
War
Post War Reconstruction
• Technologyshock
• Natural Factors
• Population growth
Examples of Business Cycle:
Great Depression of 1930
* Information Technology bubble burst of 2000
o Global Economic Crisis (2008-09)
* Business cycles are contagious and are international in
character.They begin in one country and mostly spread to other
countries through trade relations.
* The phase of the business cycle is importantfor a new business
to decide on entry into the market.
CA NEHA AGARWAL
Chapter 12 Business Cycle-Summary Notes
Business Cycle/ Trade Cycle - Fluctuation in aggregate Economic Activity
Phases of business cucle
Exparsion Peak/ Boom Contractior/ Trough
Recovery/ Upswing Prosperity Recession Downswing Depression/ Bust
Trough
Time
Phases of business cycle
1. Expansion
Increase in Economic Activity
National Income Demand
Aggregate • Expenditure Sales
Profit .lnvestment Stock Prices Bank Credit
• Employment . Price Cost
Till full employment of Resources
Involuntary Unemploygment -Zero
(Only frictional & Structural Unemployment)
Rising growth rate
2. Peak
Highest Point
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Inputs are Excess demand Input price Output Cost of
all utilised of Input Rise price rise Living rise
strain on fixed income eaners
Review Expenditures
Aggregate demand stagnant
Stagnant growth rate
3. Contraction
J In demand in Excess Supply in Production Lin demand of inputs
few sectors
In input prices (including wages)
(Consumer durable
Consumer Expenditure Further decline
goods & Capital
Goods) Employment Fall
AD falls
When such decline extend over a period of timethen called recession
4. Depression
Severe form recession is depression Low interest rates
Bankruptcies/ liquidations/ shut downs More Liquidity
High unemployment Low investment
Lowest prices Low credit availability
Peak and Depression collectivelyare called as tuning points.
The great depression of 1424-33 is still cited for the enormous misery and huwman
sufferings it caused.
5.Recovery
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Starts from Accept low Low cost of Business confidence Investmnent
labour market wages production takes off rises
Indicators of Business Cycle
Leading Lagging Coincidental/ concurrent
Change After real Occur simultaneously
Change before real output
output changes with business cycle
changes
Examples movements
Example
.New • Unemployment Examples
orders for
consumer goods or for
P&M
.
• Corporate profits
Labour cost per unit
GDP, Personal
Inflation
Retail sales
income
of output
building permits
Interest rates Stock market prices
slower deliveries
Consumer price index Industrialproduction
Features of business cycle
Occur Periodically, but irregular Some industries (Capital & durable consumer
Different intensity goods) affected the most
Length not definite No uniform characteristics &e causes
Originates in free market Have serious consequences on wellbeing of society
ecOnomy Contagious & pervasive
Causes of Business Cycle
Internal Causes Extemal Causes
Internal Causes
V Fluctuation in AD
According to Keynes, fluctuations in economic activities are due to fluctuations in
aggregate effective demand
AD causes expansion or boom
Tin
& in AD causes recession or depression
Net foreign demand (exports- imports) part of AD
