BUSINESS CYCLE

BY:

RAJIV MENON(23) YASH SHAH(45) AKHILESH MANIKERI(24) ASHISH GAIKWAD(11) NIRAJ DOSHI(9) PUNIT CHAWLA(4)

A business cycle refers to periods of expansion and contraction. A peak is the high point following a period of economic expansion. A trough is the low point following a period of economic decline.

What is a business cycle?

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Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises.

A cycle consists of:

Expansions.

General recessions.

Contractions

And revivals which merge into the expansion phase of the next cycle.

According to Arthur F. Burns and Wesley C. Mitchell..

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Business Cycle…

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• Keynesian Theory Proposed by John Maynard Keynes, one of the foremost

contemporary English economist.He challenges the generally accepted view that the way 2

end depression is to cut expenses, especially wages ,and by doing so encourage full employment and revival.

In making his decision on this point he considers three valuable factors:

1)The propensity to consume. 2)The prospective return of new capital investment. 3)Rate of interest.

Theories of Business Cycle…

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Class of theories explored first by John Muth(1961)

Real business cycle theory (RBC theory) are a class of macroeconomic models in which business cycle fluctuations to a large extent can be accounted for by real (in contrast to nominal) shocks.

Theories of Business Cycle…

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Politically based business cycle… DEFINITION:Concept that politicians manipulate an

economy (usually by increasing or decreasing money supply) to achieve personal ends, specially during an election period

Theories of Business Cycle…

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The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in Real GDP and other macroeconomic variables.

How we measure Business Cycle?

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Expansion: A speedup in the pace of economic activity.

Peak: The upper turning of a business cycle.

Contraction : A slowdown in the pace of economic activity.

Trough : The lower turning point of a business cycle, where a contraction turns into an expansion.

Stages of Business Cycle…

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Expansion Production up Employment up

Peak Production highest Employment highest Inflationary pressure

Stages of Business Cycle…

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Contraction Production down Employment down Recession

Trough Production lowest Employment lowest

Revival

Stages of Business Cycle…

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Low levels of unemployment – shortages of labour occur pushing up wage rates

High levels of consumer borrowing and spending

Firms working at full capacityProfit levels highInflation IncreasingInterest rates increasingBoom in housing market

Parts of Business Cycle- PEAK

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Recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction.

Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization household incomes, business profits and inflational fall during recessions.

Bankruptcies and the unemployment rate rises.

Parts of Business Cycle- RECESSION

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Exports had declined by around 12 per cent in November 2008.

double-digit decline owing to lack of demand from most of the buying markets

Indian industry shrunk for the first time in 15 years with a 0.4 per cent year-on-year decline in October 2008.

Recession- Impact on INDIA

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Government Measures…

The government attempt to control fluctuations in economic growth

The Government use Fiscal and Monetary policy to achieve this objective.

How to tackle the Recession

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It is represented by the executive and legislative branches of government and captures changes in taxes (T) and government spending (G).

If the economy is in a recession, a combination of tax cuts and increases in government spending can stimulate economic activity.

Fiscal Policy…

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It is conducted by the central bank of a country.

Embraces banking and credit policy relating to loans and interest rates

In a depression a policy of cheap money may be adopted to stimulate business investment and thus assist recovery.

Monetary Policy…

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The repo had been brought down to 6.5 per cent effective November 3, 2008 and

The CRR reduced to 5.5 per cent effective November 8, 2008.

There is no doubt these measures have helped the economy and thereby the demand for goods and services.

RBI's Monetary Policy…

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Consumer confidence grows – leading to increased borrowing and spending

Firms increase output – build up stock levels

Spare capacity used, thenInvestment occursUnemployment falls – it may take more

than a year of recovery for large changes in unemployment.

Parts of Business Cycle: Revival

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According to Market Watch US economy is slowly recovering.

Current unemployment rate in US is 7%

Current unemployment rate in India is 7%

Current world economic growth is 2.9%

Indian economy surges 7.9 % in Sept 2009.

Current Condition On World's Economy

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