Business Cycle

Economic Growth

It’s a sustained increase in per capita national output or NNP over a period of time.

Rate of increase in total output must be greater than the rate of population.

National output is composed of such goods and services which satisfy the maximum wants of the maximum number of people

Economic Growth

Determinants of EG

Human resources and its quality

Natural resources

Capital formation

Technological development

Social and Political factors

Business Cycle

Economic Growth in countries have not followed a steady and smooth trend.

There are long upward trend in GNP, but with periodical short –run fluctuations in economic activity.

The economies of the countries have shown period of economic expansion alternating with period of contraction.

I ≠ S

Business Cycle

Thus

Business / Trade Cycle:

“ Fluctuation of Economic activity characterized by alternating periods of expansion and contraction.”

Phases Of Business Cycle

Time

Growth RateSteady Growth LineProsperity Depression

Phases of Business Cycle

5 Phases of Trade Cycle

1. Expansion

2. Peak or Prosperity

3. Recession

4. Trough, bottom of Depression

5. Recovery and Expansion

Prosperity : Expansion and Peak1. Expansion

Rise in National output, consumer and capital expenditureprices of raw material.

Increase in

InvestmentDemandOutputEmploymentIncomeProfitInvestmentBank CreditPurchasing PowerPricesStandard of Living

Prosperity : Expansion and Peak2. Peak

Input starts falling short of demand Workers are hard to find Input prices increases Output price increases Cost of living is higher than income Actual demand decrease

or Bank start reducing credit Profit expectations change Businessman become Pessimistic

Turning Point and Recession3. Recession

Increase in Demand halts Demand starts decreasing in some sectors Producers being unaware keep up the production and Investment Supply > Demand Excess Inventories

Hence it leads to Future Investment plans are given up Cancellation of Input orders Demand for labours falls Decline in Investment Decline in Income and Consumption Bank Credit shrinks, Stock prices decreases, Unemployment Increases

Depression and Trough4. Depression

Economic activities slide down their normal level

Growth Rate becomes negative

Level of National Income and Expenditure declinesPrices of consumer and capital goods declineWorkers lose their jobDebtors find it difficult to payDemand for bank credit is at the lowestInvestment in stock least attractive

Weaker firm get eliminated

The Recovery5. Recovery or Reversal

Unemployment forces worker to work at lower wages The producers start taking optimistic approach Consumers begin to resume their postponed consumption

expecting no further decline Bankers with their excess liquidity lowers their lending rate Stock prices move up Producers start replacing Capital stock Investment and Employment increases Demand for consumer and capital goods rises Price level rises

Features of Business Cycle

1. Business cycle occur periodically but they don not show sameregularity.

It has distinct phases The duration varies from 3 to 12 years

2. These cycles are Synchronic. They do not cause changes in any single industry or sector but for all.

3. Fluctuation occur not only in production and income but also in other variables like employment, investment , consumption, rate of interest , price level.

Features of Business Cycle

4. Investment and Consumption of Durable consumer goods gets effected.

5. Consumption of Non- durable goods and services does not vary.

6. Inventories of goods get affected by the impact of depression and expansion.

7. Profits fluctuates more than any other type of income.

8. They are International in character.

Economic Stabilization Policies

Business Cycles and its violent fluctuations cause lots of harm to both Business and human.

Various means to control and Stabilize business cycle need to planned

The major stabilization problem in the developing countries is the problem of controlling prices.

In developed countries is of preventing the sliding growth rates

ObjectiveThe major objective of Stabilization policies are:

Prevention of excessive economic fluctuation Efficient utilization of labour and other productive

resources. Encouraging free competitive enterprises Avoiding conflict between internal and external

interests of the economy Sustained Economic Growth Economic Stability Social Justice and Equity

ACTIVE INTERVENTION BY THE

GOVERNMENT

Economic policies for Stabilization

Economic Policy

Fiscal Policy Monetary Policy