BUSINESS CYCLESFarala, 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 CYCLEPEAK RECESSION TROUGH RECOVERY Level of business activity Time
Level of business activity PEAK Time 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 high
Level of business activity RECESSION Time Recession 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
TROUGHLevel of business activity Time Trough or Depression PhaseProlonged recessionLowest point of real GDPOutput and unemployment “bottom out”There is no precise decline in output at which aserious recession becomes a depression
Level of business activity RECOVERY Time Expansionary or Recovery PhaseRenewed economic growthReal output in the economy is increasingUnemployment rate is decliningThe upswing part of the cycle
per yearReal GDP Peak Peak Trough One cycle Time
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 claims Manufacturers’ new ordersLagging INDICATORS • Variables that change after real output changes. They include: Inventories to sales ratio Outstanding commercial loans
characteristicsWave like fluctuationThe periods of boom and depression occur alternatively.It is recurring in natureThe four phases of trade cycle repeat themselves with somesort of regularity.No two trade cycles are identicalThe cause, impact and periodicity of two trade cycles may not be same.Steep wall towards depressionThe upward movement towards boom is slow and steady. But the downfall is steep, sudden and often violent causing disaster all round.Synchronic in natureDifferent 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