Three Types of Business CycleBusiness Cycle PhasesBusiness Cycles as shifts in AD and ASBusiness Cycle Methods
The business cycle occurs when economic activity speeds up or slows down. A business cycle is a swing in total national output, income and employment, usually lasting for a period of 2 to 10 years, marked by widespread expansion or contraction in many sectors of the economy.
Q Business cycles are the irregular expansions and Potential output contractions in economic activity. Actual output t (in years)
Economic theory define three types of business cycle: Short-term (Kitchin) cycle: from 2 to 4 years, it results from the changes in business inventories. Medium-term (Jouglar) cycle: from 7 to 11 years, it refers to new business investment. Long-term (Kondratiev) cycle: from 30 to 50 years, it results from the technological innovation.
A business cycle can be divided into four major phases: Recession – the downturn of a business cycle. This is a period in which real GDP declines for at least 2 consecutive quarter-years. Trough – the lowest point of real GDP at the end of a recession.
Expansion (boom) is a period in which output increases and approaches potential GDP or perhaps even overshoots it. Peak – the point at which recession begins, the highest point in real GDP before a recession.
Business cycle generally occurs as a result of shifts in the AD. Decline in the AD lowers output and as a result of downward shift in the AD curve, the gap between actual and potential GDP becomes greater during a recession.
P AS Characteristics of the recession: QP •Consumers purchases decline and businesses react by holding back AD production. Real GDP falls. AD1 Businesses investment also falls. •The demand for labor falls. •The prices of many commodities fall. E Wages are less likely to decline, butP they tend rise less rapidly.P1 E1 •Business profit fall, because the demand for credit falls, interest rates 0 Q1 Q generally also falls.
P AS QP AD1 The case of a boom is, naturally, just the opposite AD of recession.P1 E1 EP 0 Q Q1 Q
Public distribution system: distribution of essential commodities to a large number of people Fair price shops: Essential commodities are being distributed as per the eligibility and rates fixed by the Government rationing: controlled distribution of scarce resources control of black marketing Hoarding: Govt. controls the flow of money.
public revenue: In order to perform duties and functions government require large amount of resources, which are via Tax revenue and Non-tax revenue public expenditure: The expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people Public borrowing Financial administration