The document discusses business cycles and the phases of recession, depression, recovery, and boom. It notes that since the 1940s, downturns have been less severe, the duration of business cycles has increased, and expansions have lasted longer than contractions on average. It also discusses leading and coincident economic indicators that can provide information about the current and future state of the business cycle. Procyclical variables like consumption move in the same direction as GDP, while countercyclical variables like unemployment move in the opposite direction.

1. BUSINESS CYCLES

2.  The business cycle is the upward and
downward movement of economic
activity or real GDP that occurs around
the growth trend.
 Since the late 1940s, :Downturns and
panics have generally been less severe.
 The duration of business cycles has
increased.
 The average length of expansions has
increased while the average length of
contractions has decreased.

3. The Phases of the Business
Cycle
 A peak is the top of the business cycle.
 A trough is the bottom of the business
cycle.
 A boom is a very high peak.
 A downturn is when economic activity
starts to fall from a peak.
 A upturn is when economic activity
starts to rise from a trough.

4. The Phases of the Business
Cycle
 Hence the four main phases are:
 Recession
 Depression
 Recovery
 Boom
 Recession occurs faster while recovery
is a slower process.

5. 
GDP
Cyclical nature:
m
Peak
o
Bo
Do rn
wn tu
tu Up
rn Secular
growth
trend
Trough
time

6.  RECESSION:
 Consumer demand falls
 Investment already undertaken appears
unprofitable
 New investment is unlikely
 Production and employment fall
 General price level likely to fall
 DEPRESSION:
 In the absence of any stimulus, to
aggregate demand, depression sets in.

7.  RECOVERY:
 Business confidence returns
 Production, sales and profits increase
 Employment increases
 Price levels start increasing
 New technology is adopted
 BOOM:
 Output levels increase to go beyond the
trend to a boom.

8.  Full utilization of capacity
 High investment expenditure
 High profits
 High business expectations
 New investment is profitable

9. Limits to the Business Cycles:
 Ceilings:
 When full employment level of output is
reached, total volume of output is restricted
to limited availability of labour.
 Floors:
 At its worst level, business confidence is so
low that there is no investment at all.

10. ACCELERATOR &
MULTIPLIER:
 The level of investment depends on
rate of change of national income
 IT = a.dy
 IT = dk
 a = dk/dy
 a: accelerator coefficient

11.  If there is an initial injection, multiplier
action will start, which will cause output
to increase and hence through the
accelerator, the investment will increase
and setoff another chain of multiplier
reaction.
 If, however, the full employment level is
reached and output cannot increase any
further, the investment does not take
place and the ceiling is reached.

12. Multiplier & Accelerator:
Sales 1000 1000 2000 3000 3500 3500 3400
machines 10 10 20 30 35 35 34
Induced INV. 0 10 10 5 0 0
Replacement 1 1 1 1 1 0
INV.
Total Inv. 1 11 11 6 1 0

13. Indicators:
indicator recovery boom
Industrial Gradual increase high
production.
Commodity -do- -do-
prices
Cost of Increases but Increase
production slower than faster than
commodity prices recovery
profits satisfactory high

14. Investment Replacement High
Employment Gradual Rapid increase
increase
Bank loans Liberal High demand
for advances
Speculation Increases high
Inventory Fall Zero
stocks
Business Rare Zero
failures
Business Cautious but optimistic
expectations optimistic

15. Leading Indicators
 Leading indicators tell us what's
likely to happen in the economy 12 to
15 months from now.
 The are indicators rather than
predictors because they are only rough
approximations of what’s likely to
happen in the future.

16. Indicators:
 Leading indicators include the following:
 Average workweek for production workers in
manufacturing.
 Unemployment claims.
 New orders for consumer goods and materials.
 Stock prices
 Residential construction
 Capacity utilization
 Interest rate spread.
 Changes in the money supply.

18. Indicators:
 Coincident indicators are business
investment expenditure, industrial
production
 Lagging indicators are job vacancies,
unit labour costs etc

19. Procyclical vs countercyclical
 Variables which move in the same
direction as the GDP over the business
cycles are procyclical.
 E.g consumption
 Variables which move in the opposite
direction to GDP are countercyclical
 E.g unemployment

20. Variables:
Pro-cyclical Countercyclical
Industrial production Unemployment
Commodity prices Inventory stocks
Cost of production Business failures
Profits
Investment
Wages
Bank loans