III. Business Cycle BO O M PEAK RECESSION DEPRESSION TROUGHS REVIVAL POTENTIAL GDP REAL GDP O TIME X Y
III. Business Cycle - Recession <ul><li>Industrial production— Decline </li></ul><ul><li>Commodity Prices— Decline </li></...
III. Business Cycle - Depression <ul><li>Industrial production— Rapid Decline </li></ul><ul><li>Commodity Prices—  Rapid D...
III. Business Cycle - Recovery <ul><li>Industrial production— Gradual Increase </li></ul><ul><li>Commodity Prices—  Gradua...
III. Business Cycle - Boom <ul><li>Industrial production— Rapid Increase </li></ul><ul><li>Commodity Prices—  Rapid Increa...
Inflation <ul><li>Inflation is commonly defined as a persistent and appreciable rise in general price level of prices. </l...
Demand – Pull Inflation <ul><li>Increase in the Public Expenditure  </li></ul><ul><li>Increase in Private Expenditure  </l...
Demand – Pull  Inflation AD 1 AD2 AD3 AD4 Y* X o Y P 1 P 2 P 3 P 4 Output Price Level AS a b c d
Cost – Push Inflation : <ul><li>Scarcity of the Factors of Production  </li></ul><ul><li>Bottlenecks  </li></ul><ul><li>Na...
Cost- Push Inflation Output Price Level Y X o AD AS 1 AS 2 AS 3 AS a b c P 1 P 2 P 3 Y*
National Income
Gross National Product (GNP) <ul><li>… is the total measure of the flow of goods and services at market value resulting fr...
Following are not included in GNP ……. <ul><li>Goods and services rendered free of charge.  </li></ul><ul><li>Sale and purc...
National Income <ul><li>Net Factor  Income from Abroad (NFIA)= Export - Imports (X-M) </li></ul><ul><li>Market Price  is w...
Private Income <ul><li>Private income = National Income at factor cost (NNP fc ) + Transfer Payments + Interest on Public ...
Personal Income <ul><li>Personal Income = National Income – Undistributed Corporate Profits – Profit Taxes – Social Securi...
Personal Disposal Income (PDI) <ul><li>PDI = National Income – Business Savings – Indirect Taxes + Subsidies – Direct Taxe...
Real Income <ul><li>When National income is expressed in terms of a general level of prices of a particular year taken as ...
Per Capita Income <ul><li>Per Capita Income = National Income </li></ul><ul><li>_______________  </li></ul><ul><li>  Total...
Three Approaches or Methods to calculate GNP <ul><li>Income Method </li></ul><ul><li>Expenditure Method </li></ul><ul><li>...
Income Method <ul><li>GNP = Wages and Salaries + Rent +  Interest + Dividends  </li></ul><ul><li>+ Undistributed Corporate...
Expenditure Method <ul><li>GNP = Private Consumption Expenditure (C) +Gross Domestic Private Investment (I) + Government E...
Value- Added Method <ul><li>In calculated GNP the money value of final goods and services produced at current prices durin...
Value Added Method Sectors Total Output Intermediate purchase Value –  Added Agriculture 30 10 20 Manufacturing 70 45 25 O...
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Busi cycle, inflation

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  • Prof. Samita Kher- Managerial Economics
  • Busi cycle, inflation

    1. 1. III. Business Cycle BO O M PEAK RECESSION DEPRESSION TROUGHS REVIVAL POTENTIAL GDP REAL GDP O TIME X Y
    2. 2. III. Business Cycle - Recession <ul><li>Industrial production— Decline </li></ul><ul><li>Commodity Prices— Decline </li></ul><ul><li>Cost of production— Gradual Decline </li></ul><ul><li>Profits— Gradual Decline </li></ul><ul><li>Investment— Falls slowly </li></ul><ul><li>Employment— Starts Falling </li></ul><ul><li>Wage rate— Starts Falling </li></ul><ul><li>Bank credit— Starts Falling </li></ul><ul><li>Bank Reserves— Suffers a Set back </li></ul><ul><li>Discount rates— Gradual Decline </li></ul><ul><li>Speculation activity— Minimum Possible </li></ul><ul><li>Inventory stocks— Gradual increase </li></ul><ul><li>Business failures— Fall in numbers </li></ul><ul><li>Business expectations— Pessimistic </li></ul>
    3. 3. III. Business Cycle - Depression <ul><li>Industrial production— Rapid Decline </li></ul><ul><li>Commodity Prices— Rapid Decline </li></ul><ul><li>Cost of production— Rapid increase but slower than prices </li></ul><ul><li>Profits— Negligible </li></ul><ul><li>Investment— Falls rapidly </li></ul><ul><li>Employment— Falls rapidly </li></ul><ul><li>Wage rate— Falls rapidly than the commodity prices. </li></ul><ul><li>Bank credit— Falls rapidly </li></ul><ul><li>Bank Reserves— Falls rapidly </li></ul><ul><li>Discount rates— Falls rapidly </li></ul><ul><li>Speculation activity— Hardly any </li></ul><ul><li>Inventory stocks— High Level </li></ul><ul><li>Business failures— Large in numbers </li></ul><ul><li>Business expectations— Highly Pessimistic </li></ul>
    4. 4. III. Business Cycle - Recovery <ul><li>Industrial production— Gradual Increase </li></ul><ul><li>Commodity Prices— Gradual Increase </li></ul><ul><li>Cost of production— Gradual Increase </li></ul><ul><li>Profits— Satisfactory </li></ul><ul><li>Investment— Replacing of existing capital </li></ul><ul><li>Employment— Gradual Increase </li></ul><ul><li>Wage rate— Improvement </li></ul><ul><li>Bank credit— Liberal Loans </li></ul><ul><li>Bank Reserves— Improvement </li></ul><ul><li>Discount rates— A little improvement </li></ul><ul><li>Speculation activity— Gradual Increase </li></ul><ul><li>Inventory stocks— Gradual decline </li></ul><ul><li>Business failures— Smaller in numbers </li></ul><ul><li>Business expectations— Optimistic with cautious decision-making </li></ul>
    5. 5. III. Business Cycle - Boom <ul><li>Industrial production— Rapid Increase </li></ul><ul><li>Commodity Prices— Rapid Increase </li></ul><ul><li>Cost of production— Rapid Increase but slower than price </li></ul><ul><li>Profits— High </li></ul><ul><li>Investment— High </li></ul><ul><li>Employment— Rapid Increase </li></ul><ul><li>Wage rate— Rapid Increase but less than price of goods and services </li></ul><ul><li>Bank credit— Liberal Loans but high demand for advances </li></ul><ul><li>Bank Reserves— Rapid Increase </li></ul><ul><li>Discount rates— Rapid Increase </li></ul><ul><li>Speculation activity— At a high level </li></ul><ul><li>Inventory stocks— Very Little </li></ul><ul><li>Business failures— Hardly any </li></ul><ul><li>Business expectations— Highly Optimistic </li></ul>
    6. 6. Inflation <ul><li>Inflation is commonly defined as a persistent and appreciable rise in general price level of prices. </li></ul><ul><li>Positive effect of inflation is- increase in output and employment. Fresh opportunities for business growth. Aggregate demand increases. </li></ul><ul><li>Negative effect of inflation is – as the prices do not grow at a uniform rate, there is misallocation of resources and in turn decline in output and income. Which adversely affect business. High inflation rate leads to unequal distribution of income and therefore aggregate demand reduces. </li></ul><ul><li>Thus, inflation from the business point of view does not provide a congenial economic environment. Therefore, government should attempt to stabilise prices. </li></ul>
    7. 7. Demand – Pull Inflation <ul><li>Increase in the Public Expenditure </li></ul><ul><li>Increase in Private Expenditure </li></ul><ul><li>Increase in Foreign Demand </li></ul><ul><li>Reduction in Taxation </li></ul><ul><li>Repayment of Internal Debts </li></ul><ul><li>Changes in Expectations </li></ul>
    8. 8. Demand – Pull Inflation AD 1 AD2 AD3 AD4 Y* X o Y P 1 P 2 P 3 P 4 Output Price Level AS a b c d
    9. 9. Cost – Push Inflation : <ul><li>Scarcity of the Factors of Production </li></ul><ul><li>Bottlenecks </li></ul><ul><li>Natural Calamities </li></ul><ul><li>Hoarding by Merchants </li></ul><ul><li>Rise in Costs. </li></ul>
    10. 10. Cost- Push Inflation Output Price Level Y X o AD AS 1 AS 2 AS 3 AS a b c P 1 P 2 P 3 Y*
    11. 11. National Income
    12. 12. Gross National Product (GNP) <ul><li>… is the total measure of the flow of goods and services at market value resulting from current production during a year in a country, including Net Factor Income from Abroad (NFIA). </li></ul><ul><li>It is money value of all goods and services produced in a country at current prices. </li></ul><ul><li>Market price of only final products should be taken into account, to avoid double counting. </li></ul>
    13. 13. Following are not included in GNP ……. <ul><li>Goods and services rendered free of charge. </li></ul><ul><li>Sale and purchase of old goods, shares, bonds and assets of existing companies. </li></ul><ul><li>Social Security like unemployment insurance allowance, old age pension and interest on public loans. </li></ul><ul><li>Profits earned or losses incurred on account of changes in capital assets as a result of fluctuations in market prices. </li></ul><ul><li>Income earned through illegal activities. </li></ul>
    14. 14. National Income <ul><li>Net Factor Income from Abroad (NFIA)= Export - Imports (X-M) </li></ul><ul><li>Market Price is when the value of goods and services are calculated according to the prevailing price. Factor Cost is when the value of goods and services is calculated as per the income received by the factors of production </li></ul>
    15. 15. Private Income <ul><li>Private income = National Income at factor cost (NNP fc ) + Transfer Payments + Interest on Public Debt – Social Security – Profits and Surpluses of Public Undertakings </li></ul>
    16. 16. Personal Income <ul><li>Personal Income = National Income – Undistributed Corporate Profits – Profit Taxes – Social Security Contributions + Transfer Payments + Interest on Public Debt </li></ul>
    17. 17. Personal Disposal Income (PDI) <ul><li>PDI = National Income – Business Savings – Indirect Taxes + Subsidies – Direct Taxes on Persons – Direct Taxes on Business – Social Security Payments + Transfer Payments + Net Income from Abroad. </li></ul>
    18. 18. Real Income <ul><li>When National income is expressed in terms of a general level of prices of a particular year taken as base. </li></ul>
    19. 19. Per Capita Income <ul><li>Per Capita Income = National Income </li></ul><ul><li>_______________ </li></ul><ul><li> Total Population </li></ul><ul><li>Real Per Capita Income = Real NI </li></ul><ul><li>_______________ </li></ul><ul><li> Total Population </li></ul>
    20. 20. Three Approaches or Methods to calculate GNP <ul><li>Income Method </li></ul><ul><li>Expenditure Method </li></ul><ul><li>Value-Added Method </li></ul>
    21. 21. Income Method <ul><li>GNP = Wages and Salaries + Rent + Interest + Dividends </li></ul><ul><li>+ Undistributed Corporate Profits </li></ul><ul><li> + Mixed Income of Self employed + Direct Taxes </li></ul><ul><li>+ Indirect Taxes </li></ul><ul><li>+ Depreciation </li></ul><ul><li>+ Net Income From Abroad </li></ul>
    22. 22. Expenditure Method <ul><li>GNP = Private Consumption Expenditure (C) +Gross Domestic Private Investment (I) + Government Expenditure on Goods and Services (G) + Net Foreign Investment (X - M) </li></ul><ul><li>I.e., C + I + G + X - M </li></ul>
    23. 23. Value- Added Method <ul><li>In calculated GNP the money value of final goods and services produced at current prices during a year is taken into account. </li></ul><ul><li>This is one of the way to avoid double counting. </li></ul><ul><li>But it is difficult to distinguish between final and intermediate goods. </li></ul><ul><li>For example, fuel, raw materials, semi-finished goods etc are intermediate goods. </li></ul>
    24. 24. Value Added Method Sectors Total Output Intermediate purchase Value – Added Agriculture 30 10 20 Manufacturing 70 45 25 Others 55 25 30 Total 155 80 75

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