Business Cycle The term business cycle refers to the recurrent ups and downs in the level ofeconomic activity, which extend over several years.Peak or Prosperity Phase Highest period of economic growth Real output in the economy is at a high level Unemployment is low
Domestic output may be at its capacity Inflation may be highRecession or Contraction Phase Economic slowdown Real output is decreasing Unemployment rate is rising As contraction continues, inflation pressure fades If the recession is prolonged, price may decline (deflation) There is no precise decline in output at which a serious recession becomes a depression
Trough or Depression Phase Prolonged recession Lowest point of real GDP Output and unemployment “bottom out” There is no precise decline in output at which a serious recession becomes a depressionExpansionary or Recovery Phase Renewed economic growth Real output in the economy is increasing Unemployment rate is declining The upswing part of the cycle
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 • Variables that change before real output changes. They include: Unemployment claims Manufacturers’ new orders Lagging Indicators • Variables that change after real output changes. They include: Inventories to sales ratio Outstanding commercial loansCharacteristicsWave like fluctuationThe periods of boom and depression occur alternatively.
It is recurring in nature The four phases of trade cycle repeat themselves with somesort 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. Expansion • 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 economyAt 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 demandAt Government level Monetary policy Fiscal policy