2. BUSINESS CYCLE DEFINED
• The phenomenon of recurring ups and downs
in the levels of economic activity extending
over a period of time is known as business
cycle
• In the simplest of the terms, a business cycle
consists of a period of economic expansion
followed by a period of economic contraction
3. CHARACTERISTICS OF BUSINESS CYCLE
• Occurs periodically
• International in character
• Process is cumulative
• Cycles will be similar but not identical
4. PHASES OF A BUSINESS CYCLOE
• Peak
• Recession
• Trough
• Recovery
5. PEAK
• The stage signifies the temporary maximum of the
expansionary period
• Economy booming
• National income high
• Full employment
• Consumption and investment high
• Tax revenue high
• Wages and profits increase
• Inflationary pressure will be there. Prices rise due to
brisk competition among buyers
• Widespread optimism about future
6. RECESSION
• The last stage of boom period set the stage for a recession in the
economy
• Output and income fall leading to reduction in consumption and
investment
• Tax revenue begins to fall
• Wage demands moderate as unemployment rises
• Import and inflationary pressure declines
• Future appears to be dark and tough and general confidence level
in the economy gets affected
• Out of fear, people start saving more and consume less causing
further fall in consumption demand, income and employment
• New investment not forthcoming due to falling profits
7. TROUGH
• At the worst stage of recession, the business activities
hit a temporary bottom. This stage of business cycle is
called as trough
• Economic activities low
• Mass unemployment
• Consumption, investment and imports low
• Prices may be falling
• Profits are low
• Confidence in the economy and its future is abysmally
low
• There are a few borrowers as pessimism is widespread
8. RECOVERY
• On some positive trigger occurring, upswing in
economy may take off
• Trigger may come due to government stimulation
of consumption spending either through tax cuts
or more spending on public works, lower interest
rates, increase in confidence level or any other
random event
• Once national income starts
growing, accompanying rise in consumption
spending helps sustain the momentum
• General confidence level goes up
9. RECOVERY
Contd…
• Consumer credit increases because
households are now more willing to borrow
funds and lenders are more willing to lend
• Unemployment falls
• Consumption, investment and imports begin
to rise
• Workers demand more wages
• Inflationary pressure begins to mount
10. THEORIES ON BUSINESS CYCLE
Sunspot theory/climate theory
• Depending on climatic changes agricultural products re
produced
• Based on production, other ancillary nits will function
• Therefore, the base for any change in economic activity
of the country is climate
Psychological theory
• During depression or crisis of any business
organization, entrepreneur’s psychology as to whether
the organization can be revived or shut down plays a
vital role
11. THEORIES ON BUSINESS CYCLE
Contd…
Monetary theory
• Demand and supply of money is the primary
reason for economic fluctuations of a country
Over investment theory
• If the organizations and individuals save more
and invest a huge amount, then their
expectations are on the increase in their
returns
12. THEORIES ON BUSINESS CYCLE
Contd…
Over savings/under consumption theory
• The increase in savings and investment will
bring down the consumption which will
reduce the demand for goods in the market
Innovation theory
• More innovations lead to new technology and
new business that leads to prosperity in the
economy
13. TYPES OF BUSINESS CYCLE MODELS
Exogenous model
• The belief that economic growth arises due to influences
outside he economy or company of interest
• Exogenous growth assumes that economic prosperity is
primarily determined by external rather than internal
factors.
Endogenous model
• Trade cycle because of factors which lie within the
economic system
• Endogenous growth theory holds that investment in human
capital, innovation and knowledge are significant
contributors to economic growth
