BUSINESS CYCLES

Farala, Mary Ann CamilleForbes, Camella Joy N.Galanto, Lhenny Ann S.Gueriva, Myrene Mae A.III-ACSAD

Business Cycle

The term business cycle refers to the recurrent ups and downs in the level of economic activity, which extend over several years.

Four PHASES OF BUSINESS CYCLE• PEAK

•Level of

bu

sin

ess a

cti

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y

• Time

• RECESSION• TROUGH• RECOVERY

• GROWTH

• TREND

• PEAK

• Time

• GROWTH

• TREND•

Level of

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cti

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Peak or Prosperity PhaseHighest period of economic growthReal output in the economy is at a high levelUnemployment is lowDomestic output may be at its capacityInflation may be high

Recession or Contraction PhaseEconomic slowdown Real output is decreasing Unemployment rate is risingAs contraction continues, inflation pressure fadesIf the recession is prolonged, price may decline (deflation)There is no precise decline in output at which a serious recession becomes a depression

Level of

bu

sin

ess a

cti

vit

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Time

RECESSIONGROWTH

TREND

Trough or Depression PhaseProlonged recessionLowest point of real GDPOutput and unemployment “bottom out”There is no precise decline in output at which a serious recession becomes a depression

Level of

bu

sin

ess a

cti

vit

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Time

TROUGH

GROWTH

TREND

Expansionary or Recovery PhaseRenewed economic growthReal output in the economy is increasingUnemployment rate is decliningThe upswing part of the cycle

Level of

bu

sin

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cti

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yTime

RECOVERY

GROWTH

TREND

Peak

Trough

One cycleReco

very

Real G

DP

per

year

Recession

Time

Peak

Indicators

• Economists use changes in a variety of activities measure the business cycle, and to try to predict where the economy is headed.

• They include:– Leading indicators– Lagging indicators

LEADING INDICATORS

• Variables that change before real output changes.

They include:Unemployment claimsManufacturers’ new orders

Lagging INDICATORS

• Variables that change after real output changes.

They include:Inventories to sales ratioOutstanding commercial loans

characteristicsWave like fluctuation

The periods of boom and depression occur alternatively.

It is recurring in nature

The four phases of trade cycle repeat themselves with some

sort of regularity.

No two trade cycles are identical

The cause, impact and periodicity of two trade cycles may not be same.

Steep wall towards depression

The upward movement towards boom is slow and steady. But the downfall is steep, sudden and often violent causing disaster all round.

Synchronic in nature

Different phases of trade cycle occur almost simultaneously in different industry.

characteristicsExpansion• phase of high growth coupled with large investments,• increase in employment, income and expenditure,• but that is not all about it. Expansion also comes along

with inflation and competition.

Recession• Recession is unwarranted and creates negative

implications for the economy.• the basic problems - unemployment, excessive inventory,

below capacity operations and liquidation of firms.

Controlling business cycle During expansion firms gain, so desired phase & during

recession firms suffer, the unwarranted phase Take preventive & corrective measures to minimize their

losses during recession and to bring in stability in the economy

At Firm Level Investment – balanced mix of debt & equity Inventory – should not create large inventory, just-in-

time strategy is helpful Products – diversify in different markets & different

products, because in this way risk is also diversified Pricing – flexibility preferred. During recession prices

may be adjusted to increase demand

At Government level Monetary policy Fiscal policy