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.
The Phases of the BusinessCycle 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.
The Phases of the BusinessCycle Hence the four main phases are: Recession Depression Recovery Boom Recession occurs faster while recovery is a slower process.
GDP Cyclical nature: m Peak o Bo Do rn wn tu tu Up rn Secular growth trend Trough time
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.
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.
Full utilization of capacity High investment expenditure High profits High business expectations New investment is profitable
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.
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
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.
Indicators:indicator recovery boomIndustrial Gradual increase highproduction.Commodity -do- -do-pricesCost of Increases but Increaseproduction slower than faster than commodity prices recoveryprofits satisfactory high
Investment Replacement HighEmployment Gradual Rapid increase increaseBank loans Liberal High demand for advancesSpeculation Increases highInventory Fall ZerostocksBusiness Rare ZerofailuresBusiness Cautious but optimisticexpectations optimistic
Leading Indicators Leading indicators tell us whats 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.
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.
Indicators: Coincident indicators are business investment expenditure, industrial production Lagging indicators are job vacancies, unit labour costs etc
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
Variables:Pro-cyclical CountercyclicalIndustrial production UnemploymentCommodity prices Inventory stocksCost of production Business failuresProfitsInvestmentWagesBank loans