over view of business cycle

1. BUSINESS CYCLE

2. √ The term business cycle refers to
the recurrent ups and downs in the level of
economic activity, which extend over several
years.
√ Individual business cycles may vary
greatly in duration and intensity.
√ All display a set of phases.
Business Cycles

3. Business Cycle : Diagram
Expansion ExpansionRecession
Secular
growth
trend
slump
Peak
0
TotalOutput

4. BUSINESS CYCLES
The Business Cycle
• Business Cycles -- Periodic rises and falls that occur in
economies over time.
• Four Phases of Long-Term Business Cycles:
1. Economic Boom
2. Recession – Two or more consecutive quarters of
decline in the GDP.
3. Depression – A severe recession.
4. Recovery – When the economy stabilizes and starts to
grow. This leads to an Economic Boom.
2-4

5. PEAK
Time
√ Peak or prosperity phase:
 Real output in the economy is at a
high level
 Unemployment is low
 Domestic output may be at its
capacity
 Inflation may be high.
Levelofbusinessactivity

6. √ Contraction or recession phase:
 Real output is decreasing
 Unemployment rate is rising.
As contraction continues, inflation pressure fades.
 If the recession is prolonged, price may decline (deflation)
The government determinant for a recession is two
consecutive quarters of declining output.
Levelofbusinessactivity
Time
RECESSION

7. Levelofbusinessactivity
Time
Slump
√ Trough or depression phase:
 Output and unemployment “bottom out”
 This phase may be short-lived or prolonged
 There is no precise decline in output at which a
serious recession becomes a depression.
 Lowest point of real GDP

8. Levelofbusinessactivity
Time
RECOVERY
√ Expansionary or recovery:
 Real output in the economy is increasing
 Unemployment rate is declining
 The upswing part of the cycle.

9. Business Cycle of Pakistan
BUSINESS
CYCLE
RECESSION TROUGH RECOVERY PEAK
First B. Cycle
(1949-69)
1949-50 to
1959-60
(11 years)
1959-60 1960-61 to
1968-69
(9 years)
1968-69
Second B. Cycle
(1969-1991)
1969-70 to
1978-79
(10 years)
1978-79 1979-80 to
1990-91
(12 years)
1990-91
Third B. Cycle
(1991 - ?)
1991-92 to
2004-05 *
(14 years
2004-05 * 2005-06 to ?

11. Business Cycle
• The business cycle is the periodic but irregular up-and-down
movements in economic activity, measured by fluctuations in real
GDP and other macroeconomic variables
• A business cycle is identified as a sequence of four phases:
• Contraction (A slowdown in the pace of economic activity)
• Trough (The lower turning point of a business cycle, where a contraction
turns into an expansion)
• Expansion (A speedup in the pace of economic activity)
• Peak (The upper turning of a business cycle)

12. Features of Business Cycles
Variable Expansion Peak Recession Trough
Industrial Production Increase Rapid increase Decline Lowest
Demand Increase Highest Decline Lowest
Prices
Increase Rapid increase decline rapid decline
Cost
Increase Rapid decrease Gradual decline Rapid decline
Investment Increase High Falls slowly Falls rapidly
Employment Gradual increase Rapid increase Falls Rapid falls
Liberal Very liberal Falls Rapid falls

13. GDP Growth Rate

14. A comparison
Pakistan
• So if we measure in relation to
where the structure of
economy, agriculture has come
down from 50% to 20%.
• Within agriculture sector, there
is a change i.e. major crops are
only 36% of agriculture value
added and 14% are minor
crops, fisheries, orchards, fruits
and vegetables. Thus, we are
moving in a direction where
the same land and same
resources are being used more
efficiently in order to produce
U.S.A
• . As a contrast, agriculture is
only 2.5% in the US having a
population of 300 million, out
of which they not only feed the
entire population, but also
export to the rest of the world.
Therefore, it is important to
understand that when it is said
that agriculture is
producing/contributing more,
it is the productivity of
agriculture rather than the
share of agriculture in GDP.

16. Indicators of Business Cycles
There are variables other than real GDP that influence the business
cycle.They are classified into two:
(1) Leading Indicators: generally change before real GDP changes.

17. Recessions since 1950 show that duration and
depth are varied:
Period Duration in months Depth
(decline in real GDP)
1953-54 10 — 3.0%
1957-58 8 — 3.5%
1960-61 10 — 1.0%
1969-70 11 — 1.1%
1973-75 16 — 4.3%
1980 6 — 3.4%
1981-82 16 — 2.6%
1990-91 8 — 2.6%
2001 8 app. —3.3%

18. • The Leading Indicator System
… provides a basis for monitoring the tendency
to move from one phase to the next.
…assesses the strengths and weaknesses in
the economy
… gives clues to a quickening or slowing of
future rates of economic growth
… indicates the cyclical turning points in
moving from the upward expansion to the downward
recession, and from the recession to the upward
recovery.
How Indicators Monitor the
Four Phases of the Business Cycle

19.  Leading indicators anticipate the direction in which
the economy is headed.
 The coincident indicators provide information
about the current status of the economy
1) changing as the economy moves from one
phase of the business cycle to the next
2) telling economists that an upturn or downturn
in the economy has arrived.
 Lagging indicators change months after a downturn
or upturn in the economy has begun and help
economists predict the duration of economic
downturns or upturns.

20. Based on the theory that expectations of future
profits are the motivating force in the economy.
Companies may expand production of goods and
services and investment in new structures and
equipment,when business executives believe that
their sales and profits will rise.
When they believe profits will decline, they reduce
production and investment.
These actions generate the four phases of the
business cycle.

21. Innovation
Political events
Random events
Wars
Level of consumer spending
Seasonal fluctuations
Cyclical Impacts — durable and non durable
Causes of Fluctuations

22. An Actual Business Cycle
1981 - 1990 ($ billion, 1992 dollars)
Real GDP
Peak
Peak
Trough
One Cycle
‘80 ‘85 ‘90
4600
5200
6000
82

23. Where are we lagging behind?
• In 1969, Pakistan exports of manufactured goods were higher than the
combined exports of Indonesia, Malaysia, Philippines andThailand.
• In 1960’s Korea emulated Pakistan in its five years planning process.
• But,The tragedy is that even a country such asVietnam which was
completely devastated by the war has now overtaken Pakistan.
• Ten years ago, India which was way behind Pakistan (till 1990’s) is now
way ahead.
• As an economist the biggest challenge is: how can we organize
ourselves to improve our economy.

24. Challenges to Pakistan’s Economy which
leads to recession.
• We Import More and Export Less.
• We Consume More and Save Less.
• Government Spends More than it Earns as Revenues
• Our Share in the World Trade is Shrinking
• We Face Energy and Water Shortages
• Crisis of Governance and Implementation Weaknesses
• Political Stability, Law and Order/Security

25. Challenges to Pakistan economy
1. We Consume More and Save Less.
• Out of every hundred rupees of our national income, we
consume 85 rupees and save only 15 rupees.
• Pakistan’s saving rate is 6%. We need at least 24-25%
25% investment rate to grow, and if we want to rely on
domestic savings, your saving rate should be 25%.
• India has 34% saving rates. While China’s saving rate is
50%.

26. Challenges
2. We Import More and Export Less.
• Till 2007-2008, 80% of our imports were financed by
our export earnings.
• This ratio has come down to only 50%, it may go up to
60% but a gap of 40% of financing needs in order to
keep with the import level still exists.
• We have to change the attitude of preferring the
imported goods in order to fill in the gap b/w our
imports and exports.

27. Challenges
• 3. Government Spends More than it Earns as Revenues.
• Pakistan’s government takes away 20% of national income as
own.
• 80% is left in the private sector and 20% in the hands of the
government is spent on defense, debt servicing, development on
education, health, general administration etc.
• The revenue generated is only 15% of the GDP at best, and in
worst days it is 12 to 13%.
• Out of the every rupee of income received by a Pakistani, on
average, tax paid is only 9 paisa's and 91 paisa's remain with
individual.

28. Solutions to improve the
economy and improve business
cycle.
• How can we overcome these challenges and problems and
improve our economy?
• A lot has been written and talked about, but I will focus on only a
few action points.

29. Solutions
1.Change in National Psyche and Mindset.
• We as a nation are too much negative oriented and too much
cynical where we find everything wrong in this country.
• Unless we change our mindset and unless everybody who is
what he is supposed to do, carries out his or her task with
and honesty, we are not going to go anywhere.
• Media is muddying the water by their sensational stories and
inviting so called experts who contribute in projecting negative
thinking and negative national psyche. Unless we have a
“can do” mentality, it will be difficult to progress. There are no
short cuts available.

30. Solutions
2. Building up of Human Capital.
• There is no substitute to building up human capital. Private
public sector, NGOs, local communities, philanthropists etc, all
to put their hands on deck and participate in making sure that
child goes to school. Every high school graduate has some
and vocational skill or goes for higher education.
• Unless we build up human capital, we are just going to be left
behind because the world economy is going to be a knowledge
based economy.
• Pakistan lags behind other countries in the institutions,
infrastructure and incentives for human capital formation. We
no choice but to accelerate the pace to catch up with others.

31. Solutions
3. Use of Technology.
• The technology is spreading like a wild fire. 95 million
have mobile phones today. We can use this technology in order
provide them banking services, information on
agriculture extension, health, education etc. It is a powerful tool
which can leapfrog a lot of time which we have wasted.
• Using technology particularly the information/communication
technology for the betterment of social and economic problems
Pakistan is something which needs to be done.

32. Solutions
4. Young Labour Force.
• Pakistan is one of the few countries which has a young labour
force which can be harnessed for its own and global economy.,
• Japan, Europe, USA and after 2050 China are going to have
population where the ratio of old to young people is going to
increase. India and Pakistan are two countries where the ratio
younger people to the older ones is going to increase. If we tool
these young men and women properly, we increase the female
labour force participation, give them skills and knowledge, they
can become the labour force for the rest of the world.
• This will give a big boost to Pakistan’s own economy.

33. Solutions
5. Governance, Devolution and Decentralization.
• As the population is increasing, one cannot govern Pakistan
in Islamabad, Karachi, Lahore, Peshawar or Quetta. One has to
devolve powers, decentralize and delegate authority, provide
resources to the local/district governments so that they can
decisions at their own.
• Sitting in Islamabad one cannot visualize what is needed in
areas, but the people in rural areas know exactly whether they
need water, fertilizers or fruit processing industry. Let us devolve
powers to the people at the grassroots level and there would be
much better allocation and utilization of resources. There must,
however, be accountability of the local governments by the
provincial governments and of provincial governments by the
federal government but not interference or usurpation of

34. • If we do that, then a lot more can happen
with same amount of resources which are
being wasted today, and the economic
growth rate can be raised from 6-7 percent
average to 8-9 percent annually.

35. The Great Depression

36. The Great Depression [continued]

37. Great Depression Stats

38. GlobalDepression,1929-1932
Ave. Unemployment Rate, 1925-1928
Ave. Unemployment Rate, 1929-1933
Percent Decrease in Prices, 1929-1932

39. World War II Production of these items brought us out
of the Great Depression.
300,000 warplanes
124,000 ships
289,000 combat vehicles and tanks
36 billion yards of cotton goods
41 billion rounds of ammunition
2.4 million military trucks
111,527 tank guns and howitzers
•$288 billion was spent on the war,
•$100 billion in the first six months.
Unemployment hit an all-time low of 1.2%
and personal savings were 25.5%.

40. Sources of Business cycle
• AGGREGATE DEMAND
• AGGREGATE SUPPLY
The degree to which real GDP declines or increases depends
on the amount by which AD and AS curve shifts.

41. Business and a Boom
• A boom occurs when national output is rising at a rate faster
than the trend rate of growth
• It is characterised by HIGH consumer spending, high business
confidence, investments and profits
• There is a lot more output.

42. CAUSES OF BUSINESS CYCLES
External factors
1. Inventions and innovation: Major changes in technology can
influence the business cycle. Usually technological changes
move the economy in a positive direction, but this is not always
so.
2. Wars and political events: The impact of such events on the
economy are very fact specific- in other words, difficult to
generalize about.

43. A THOUGHT ON THE BUSINESS
CYCLE
The business cycle tends to be self-
sustaining. In other words, when in a
period of growth, the economy will
continue to grow (jobs leading to jobs)
until some event (internal or external)
intercedes.

44. A Good Cycle
More
goods
produced
More
jobs
More
spending

45. A Bad Cycle
Less
Spending
Fewer
Goods
Produced
Fewer
Jobs

46. GOVERNMENT AND THE BUSINESS CYCLE
• In order to prevent the economy from
running too hot (inflation) or too cold
(recession/depression), the government
often becomes involved in efforts to
try and stabilize the economy.
• The government has two major tools to try and stabilize
the economy and achieve its goals: fiscal policy and
monetary policy.

47. FISCAL POLICY
Fiscal policy is the taxing and spending decisions that
are made by the President and Congress.
• Fiscal policy actions of the government fall into
two general categories:
1. Raise or Lower Taxes
2. Increase or Decrease Government Spending.

48. During a Recession
The Government can
• Lower taxes and/or
• Increase spending
These actions boost the economy by putting more money in the
hands of people so they can spend it.
This is called Expansionary Fiscal Policy
FISCAL POLICY