Business Cycles
Wave like fluctuation in business activity over
a long period of time.
Characterized by recurring phases of
expansion and contraction.
Cyclical in nature - (not secular), cyclical and
random fluctuations in business activity.
Intrinsic part of modern capitalist system.
Mitchell- Business Cycle refers to fluctuations
in aggregate economic activity
Haberler– Business cycle refers to an
alternation of periods of prosperity &
depression, of good & bad business
Keynes- A business cycle is composed of
periods of good business characterized by
rising prices and low unemployment levels
with periods of bad business characterized by
falling prices and high unemployment levels.
Rhythmic wave like movement- recurring
not regular
Periodicity: no fixed period, usually 3 to 4
years
Synchronic nature: all pervading- affects
all variables like employment, investment,
consumption, price level and not just
production.
Sequential: distinct phases, same
sequence, only duration differs
Business cycles may be similar but not
identical.
Asymmetrical: Downward movement of business
cycle more violent and sudden than upward
International in character
Q:Most affected & least affected types of income?
A: Profits- residual affected more than other
incomes- contractual
Q: Most affected sectors?
A: Durable and capital goods industry
Q: Least affected sectors?
A: Non-durable essential goods industry
Immediate impact on inventories: stocks
accumulate during recession
Prosperity /Expansion/ Peak/ Upswing
Recession/ Upper Turning Point
Depression/Crisis/ Downswing/ Contraction
Recovery/Revival/ Trough/ Lower Turning
Point
Economic Activity
O
Peak
Trough
Time
Economic Activity GDP
2005-06 = 9.48%
2012-13 = 4.4%
2015-16 = 7.6%
2005-06
Peak
2012-13
2015-16
Trough
O Time
Period of optimism and boom
FEATURES
◦ Sharp rise in income, output and business
◦ Rise in effective demand due to rise in consumption
expenditure
◦ High levels of employment- no involuntary
unemployment- could be structural and frictional
◦ Continuous rise in factor prices and commodity prices
◦ Rise in interest rates
◦ High Marginal Efficiency of Capital (MEC)
◦ Rising investments due to high profits
◦ Increase in money supply and inflation
◦ Increase in bank transactions and credit
◦ Share markets bullish
Self-Destructive
Period when contractionary forces win over the
expansionary ones.
May be mild or severe.
FEATURES
A sudden decline in business activity- business
expansion stops, orders are cancelled.
Level of employment starts falling- lay-offs
Reduction in output & consumption of goods and
services and GDP
A fall in factor prices and commodity prices- household
incomes and profits-Inflation falls
Decline in investment despite lower interest rate due to
falling profits.
Decline in bank credit and rising bank reserves-
repayment of old debts
Liquidation of stocks
What causes recession?
Decrease in spending by Which perpetuates the
consumers due to lack of cycle due to limited
faith in the economy spending
Less consumption would
Which leads to high
mean decline in demand
levels of unemployment
for products
Which leads the
Lower production would
manufacturers to cut
lead to job cuts
down on production
General decline in economic activity – reaches the trough
Period of gloom and pessimism
FEATURES
A fall in effective demand due to decline in consumption
expenditure
Fall in the level of output, business and general prices
Continuous rise in unemployment
Fall in interest rates and wages
A collapse of MEC
Fall in investments due to declining profits
High bank reserves due to low credit demand
Fall in purchasing power due to decline in wage rates
Stock market bearish
Self- Defeating
Gains momentum through expansionary movement
Expectations of the entrepreneur improves.
FEATURES
Rise in level of output, business and transaction.
Slow rise in level of employment and income
Volume of bank credit begins to expand due to low
interest rates
Effective demand starts increasing due to rising
consumption expenditure
Expectation of entrepreneurs improve and stimulation of
investment activities- emerging profits
Factor prices and product prices start increasing.
Purchasing power starts rising gradually due to rise in
wages.
Stock markets start responding- become bullish
Self- Reinforcing
A new Cycle begins
Variables/ PROSPERITY RECESSION DEPRESSION RECOVERY
Phases
Output/business/AS High Falling Shrinking Rising
Effective Demand High Falling Low Rising
Employment High, near Full Lay Offs Low Rising
Income High Falling Falling Rising
Consumption Exp. High Falling Curtailed Rising
General Price level Inflated Declining Deflated Rising
Profit High Falling Drastic fall Emerging
MEC–Expected Profit High Falling Low Rising
Interest Rate Rising Falling Low Improving
Bank credit Expansion Repayments Contraction Fresh
Borrowing
Investment Exp. High Falling Declining Induced
Production of Capital Expansion Drastic fall Postponed Replacement
goods Demand
Stock Market Bullish Stocks - Bearish Bullish
liquidation
Thanks
https://www.history.com/topics/great-depression
