Business fluctuations (2)

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Business fluctuations (2)

  1. 1. BUSINESS FLUCTUATIONS• The economic history of the countries of the world, particularly the capitalist countries, is full of instances of business or economic fluctuations.• Almost all the capitalist countries have experienced business fluctuations at different stages of their economic history• The economy may go through business upswings and downswings, booms and busts, prosperity and recession and may even go through depression• At times business conditions are prosperous when large number of jobs are created, factories are found to be working in multiple shifts, prices are rising and companies are making healthy profits• At times goods remain unsold for want of adequate demand, workers are laid off and profits are low• Such a situation is known as a recession which is sometimes short and mild
  2. 2. Contd……………………• Thus even within a short span of a decade ( as in the case of India between 1991-2000 ) economies may experience upswings and downswings as in the case of Indian Economy• There can be persistent recession culminating in a depression as was the case of the great economic depression of the 1930’s which engulfed western Europe and the United States. These fluctuations or upturns and downturns are known as business cycles• Business fluctuations are inherent in a capitalist economy and therefore they are recurring in nature. They influence business decisions and set the course of business in the future• The period of prosperity is characterised by new opportunities for investment, employment and production and business is seen to be smiling• In contrast, during the period of recession, on account of falling aggregate demand, there are fewer opportunities of investment and hence growth rates of employment and output experience a continuous fall• Entrepreneur ad business managers must therefore analyse the business conditions and take appropriate decisions in order to maximise profits under the given circumstances
  3. 3. EXPANSION OR PROSPERITY PHASE• During the expansionary phase ;(1) Investment or capital expenditure rises leading to rise in employment, output, incomes and consumer expenditure along with a rise in the general price level(2) Inventory level goes up(3) The rate of interest rises along with rise in investment demand or bank credit(4) Borrowers are happy because the real effective rate of interest rates are low on account of inflation(5) There is general increase in loanable funds resulting into credit expansion(6) The profitability of enterprises goes up leading to higher dividend pay- outs which further rises into rising stock prices(7) In short, the expansionary phase is characterised by hope and optimism and the GDP continues to expand via the investment multiplier
  4. 4. THE PEAK OF THE BOOM1. As the expansionary phase advances and approaches the peak and the economy reaches near full employment levels, the supply of inputs fall short of their demand leading to rising input prises2. On account of shortage of labour and particularly skilled labour, the wage rate increases. There is competitive bidding for skilled labour. As a result, their wage rates reaches unrealistic levles leading to cost-push inflation3. Prices rise more rapidly than the rise in employment and output4. Wage incomes rise less rapidly than the rise in cost of living leading to lower standard of living (i.e) falling demand in all the sectors of the economy and the peak peters out into the down turn of recession
  5. 5. RECESSION OR THE DOWNTURN1. During the recessionary phase, aggregate supply outstrips aggregate demand and there is a general fall in prices2. The supply demand mismatch occurs because at the peak of the cycle, it is not easy to cut employment and output as fast as the fall in demand and some producers may maintain peak production levels on account of lack of awareness about the impending recession3. During the initial stages of recession, the gap between supply and demand is less and therefore it is not noticed by less ingenious producers4. As the recession progresses, inventory levels rises in some industries only to spread across the industries in later stages5. Realisation dawns on the producers leading to withdrawal of a part of the existing investment, cancelling future investment plans, laying off temporary and causal workers to bring about equilibrium between supply and demand6. The cancellation of orders for the inputs has a chain reaction in the input market for both capital as well as consumer goods7. As a result, aggregate investments, employment, output, incomes and demand falls in the entire economy leading to steady fall in the general price level and profitability of enterprises.8. This is known as the downturn or the beginning of the recession
  6. 6. Contd………………..ON ACCOUNT OF FALLING AGGREGATGE DEMANDOR DEMAND RECESSION, THE GENERAL PRICELEVEL GRADUALLY FALLS.THE CONSUMER EXPECT LOWER FUTURE PRICESAND HENCE THEY POSTPONE THEIR DEMAND.THEREFORE SUPPLY CONTINUES TO OUTSTRIPDEMAND AND THE PROCESS OF FALLING PRICESBECOMES CONTINUOUS.THE ECONOMY BEGINS TO SHRINK VIA THE REVERSEMULTIPLIER AND THE RECESSIONARY PHASE CASCADES INTODEPRESSION.
  7. 7. TROUGH OR BOTTOM OF DEPRESSION1. During the depressionary phase, the GDP growth rate becomes negative and the economy begins to shrink2. There is massive unemployment on account of rapidly falling investment levels3. Prices of consumer and capital goods decline continuously4. Credit off take reaches low levels inspite of ridiculously low rates of interest5. On account of mounting losses made by enterprises, stock prices take a beating leading to an overall crash of the economy6. At the bottom of the peak of the depression, the economy reaches the trough and the depressionary cycle comes to an end7. Once the depressionary phase terminates in its natural course, economic recovery begins. The economic recovery is charted by the labour market.8. As there is widespread unemployment, workers are found willing to work at wages less than the prevailing wage rates9. Producers begin to expect better profits and gradually investment, employment, output and income rise. Rising incomes leads to rising demand and economic revival. Pent-up demand or postponed consumption gets converted into effective demand. Rising demand creates hope and optimism with no expectation of a further fall in interest rates, investment demand picks up and there is general economic revival
  8. 8. THE RECOVERY AND EXPANSION1. Increased investment, employment, output, income and demand signals the beginning of the recovery phase of business cycle2. The pace of recovery is accelerated by the investment multiplier process3. Existing plant and machinery are put to work once again, fresh investments are made and the economy gradually moves from recovery phase into the expansionary phase once again.4. Prices gradually begins to rise once the recovery phases gives away to the expansionary phase.5. Rising prices leads to rising investment, employment, output, incomes and demand, thus completing the business cycle

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