The document discusses the nature and phases of business cycles. It notes that business cycles refer to fluctuations in aggregate economic activity that occur periodically, including expansion, peak, contraction and trough phases. It provides examples of leading, lagging and coincident indicators that are used to measure and predict business cycles. Causes of business cycles discussed include fluctuations in effective demand, investment, government spending, money supply, and psychological factors like optimism and pessimism. Examples of past business cycles like the Great Depression and Global Financial Crisis are also mentioned.
The document discusses the nature and phases of business cycles. It notes that business cycles refer to fluctuations in aggregate economic activity that occur periodically, including expansion, peak, contraction and trough phases. It provides examples of leading, lagging and coincident indicators that are used to measure and predict business cycles. Causes of business cycles discussed include fluctuations in effective demand, investment, government spending, money supply, and psychological factors like optimism and pessimism. Examples of past business cycles like the Great Depression and Global Financial Crisis are also mentioned.
The document discusses the nature and phases of business cycles. It notes that business cycles refer to fluctuations in aggregate economic activity that occur periodically, including expansion, peak, contraction and trough phases. It provides examples of leading, lagging and coincident indicators that are used to measure and predict business cycles. Causes of business cycles discussed include fluctuations in effective demand, investment, government spending, money supply, and psychological factors like optimism and pessimism. Examples of past business cycles like the Great Depression and Global Financial Crisis are also mentioned.
The document discusses the nature and phases of business cycles. It notes that business cycles refer to fluctuations in aggregate economic activity that occur periodically, including expansion, peak, contraction and trough phases. It provides examples of leading, lagging and coincident indicators that are used to measure and predict business cycles. Causes of business cycles discussed include fluctuations in effective demand, investment, government spending, money supply, and psychological factors like optimism and pessimism. Examples of past business cycles like the Great Depression and Global Financial Crisis are also mentioned.
BUSINESS ECONOMICS Chapter:1 Nature & Scope of Business Economics
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CA FOUNDATION COURSE
BUSINESS ECONOMICS Chapter:3 Theory of Production and Cost
LMR
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CHAPTER-5 BUSINESS CYCLES
CHAPTER AT A GLANCE BUSINESS CYCLE: MEANING: Business cycle refers to the fluctuations in the aggregative economic activities. It mainly occurs due to the impacts on the aggregative demand. They are recurrent and occurs periodically, though the lasting of its phases is unpredictable. PHASES OF BUSINESS CYCLE: 1. Expansion (also called Boom or Upswing) 2. Peak or boom or Prosperity 3. Contraction (also called Downswing or Recession) 4. Trough or Depression Expansion: The expansion phase is characterised by increase in national output, employment, aggregate demand, capital and consumer expenditure, sales, profits, rising stock prices and bank credit. The growth rate eventually slows down and reaches its peak. Peak The term peak refers to the top or the highest point of the business cycle. This is the end of expansion and it occurs when economic growth has reached at a saturation point and then move in the reverse direction. Contraction: The economy cannot continue to grow endlessly. This is the turning point and the beginning of recession. Trough and Depression: Depression is the severe form of recession and is characterized by extremely sluggish economic activities. During this phase of the business cycle, growth rate becomes negative and the level of national income and expenditure declines rapidly The great depression of 1929-33 Recovery: The economy cannot continue to contract endlessly. It reaches the lowest level of economic activity called trough and then starts recovering. Trough generally lasts for some time and marks the end of pessimism and the beginning of optimism. This reverses the process
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INDICATORS: It is very difficult to predict the turning points of business cycles. Economists use changes in a variety of activities to measure the business cycle and to predict where the economy is headed towards. These are called indicators TYPES OF INDICATORS: 1. LEADING INDICATOR: A leading indicator is a measurable economic factor that changes before the economy starts to follow a particular pattern or trend. In other words, those variables that change before the real output changes are called ‘Leading indicators’ 2. LAGGING INDICATOR: Lagging indicators reflect the economy’s historical performance and changes in these indicators are observable only after an economic trend or pattern has already occurred. In other words, variables that change after the real output changes are called ‘Lagging indicators’. Some examples of lagging indicators are unemployment, corporate profits, labour cost per unit of output, interest rates, the consumer price index and commercial lending activity. 3. COINCIDENT INDICATOR: Coincident economic indicators, also called concurrent indicators, coincide or occur simultaneously with the business-cycle movements. They describe the current state of the business cycle. In other words, these indicators give information about the rate of change of the expansion or contraction of an economy more or less at the same point of time it happens. A few examples of coincident indicators are Gross Domestic Product, industrial production, inflation, personal income, retail sales and financial market trends such as stock market prices. EXAMPLES OF BUSSINESS CYCLE: • Great Depression of 1930 • Information Technology bubble burst of 2000 • Global Economic Crisis (2008-09) (RECENT) FEATURES OF BUSINESS CYCLES: Different business cycles differ in duration and intensity. But there are certain features which they commonly exhibit: (a) Business cycles occur periodically although they do not exhibit the same regularity. The duration of these cycles vary. The intensity of fluctuations also varies. (b) Business cycles have distinct phases of expansion, peak, contraction and trough. These phases seldom display smoothness and regularity. The length of each phase is also not definite. (c) Business cycles generally originate in free market economies. They are pervasive as well. Disturbances in one or more sectors get easily transmitted to all other sectors. (d) Although all sectors are adversely affected by business cycles, some sectors such as capital goods industries, durable consumer goods industry etc, are disproportionately affected. Moreover, compared to agricultural sector, the industrials sector is more prone to the adverse effects of trade cycles. (e) Business cycles are exceedingly complex phenomena; they do not have uniform characteristics and causes. They are caused by varying factors. Therefore, it is difficult to make an accurate prediction of trade cycles before their occurrence.
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(f ) Repercussions of business cycles get simultaneously felt on nearly all economic variables viz. output, employment, investment, consumption, interest, trade and price levels. (g) Business cycles are contagious and are international in character. They begin in one country and mostly spread to other countries through trade relations. For example, the great depression of 1930s in the USA and Great Britain affected almost all the countries, especially the capitalist countries of the world. (h) Business cycles have serious consequences on the well being of the society. CAUSES OF BUSSINESS CYCLE: 1. Internal Causes: The Internal causes or endogenous factors which may lead to boom or bust 1. Fluctuations in Effective Demand: According to, KEYNES fluctuations in economic activities are due to fluctuations in aggregate effective demand (Effective demand refers to the willingness and ability of consumers to purchase goods at different prices). 2. Fluctuations in Investment: ` According to some economists, fluctuations in investments are the prime cause of business cycles. 3. Variations in government spending: Fluctuations in government spending with its impact on aggregate economic activity result in business fluctuations. Government spending, especially during and after wars, has destabilizing effects on the economy. 4. Macroeconomic policies: Macroeconomic policies (monetary and fiscal policies) also cause business cycles. Expansionary policies, such as increased government spending and/or tax cuts, are the most common method of boosting aggregate demand. This results in booms. Similarly, softening of interest rates, often motivated by political motives, leads to bust. 5. Money Supply: According to Hawtrey, trade cycle is a purely monetary phenomenon. Unplanned changes in supply of money may cause business fluctuation in an economy. An increase in the supply of money causes expansion in aggregate demand and in economic activities. However, excessive increase of credit and money also set off inflation in the economy 6. Psychological factors: According to Pigou, modern business activities are based on the anticipations of business community and are affected by waves of optimism or pessimism. According to Schumpeter’s innovation theory, trade cycles occur as a result of innovations which take place in the system from time to time. The cobweb theory propounded by Nicholas Kaldor holds that business cycles result from the fact that present prices substantially influence the production at some future date. The present fluctuations in prices may become responsible for fluuctuations in output and employment at some subsequent period.
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External Causes: The External causes or exogenous factors which may lead to boom or bust 1. WARS 2. POST WAR RECONSTRUCTION 3. TECHNOLOGY SHOCKS 4. NATURAL FACTORS 5. POPULATION GROWTH RELEVANCE OF BUSINESS CYCLES IN BUSINESS DECISION MAKING: Business cycles affect all aspects of an economy. Understanding the business cycle is important for businesses of all types as they affect the demand for their products and in turn their profits which ultimately determines whether a business is successful or not. Knowledge regarding business cycles and their inherent characteristics is important for a businessman to frame appropriate policies. The stage of the business cycle is crucial while making managerial decisions regarding expansion or down- sizing. Businesses have to advantageously respond to the need to alter production levels relative to demand. Different phases of the cycle require fluctuating levels of input use, especially labour input. Firms should exercise the capability to expand or rationalize production operations so as to suit the stage of the business cycle. Business managers need to work effectively to arrive at sound strategic decisions in complex times across the whole business cycle, managing through boom, downturn, recession and recovery. Businesses whose fortunes are closely linked to the rate of economic growth are referred to as “cyclical” businesses. These include fashion retailers, electrical goods, house-builders, restaurants, advertising, overseas tour operators, construction and other infrastructure _rms. During a boom, such businesses see a strong demand for their products but during a slump, they usually suffer a sharp drop in demand. Overcoming the effects of economic downturns and recessions is one of the major challenges of sustaining a business in the long-term. The phase of the business cycle is important for a new business to decide on entry into the market. The stage of business cycle is also an important determinant of the success of a new product launch. Surviving the sluggish business cycles require businesses to plan and set policies with respect to product, prices and promotion.
