What is a Business Cycle? The term business cycle refers to the recurrent ups and downs in the level of economic activity, which extend over several years. Definition: alternating increases and decreases in the level of business activity of varying amplitude and length.
How do we measure “increases and decreases in business activity?” Percent change in real GDP. Why do we say “varying amplitude and length?” Some downturns are mild and some are severe, whereas, Some are short (a few months) and some are long (over a year). Do not confuse with seasonal fluctuations!
Periods of Business Cycle The Short Kitchin Cycle (40 months). The Long Jugler Cycle (9 ½ years). The Very Long Kondratieff Cycle (50 years). Building Cycle (18 years). Kuznets Cycle (16-20 years).
Characteristics : PeakPhase Real output in the economy is at a high level. Unemployment is low. Domestic output may be at its capacity. Inflation may be high.
Characteristics : Contraction orRecession 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
Characteristics : Trough orDepression Phase Lowest point of real GDP. 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.
Characteristics : Expansion orRecovery Phase Real output in the economy is increasing. Unemployment rate is declining. The upswing part of the cycle.
Growth Phase – Boom Phase Launched in India in 1988 Consistent Growth. Waves of optimism. Highest point of Expansion. Rise in profits, investment, sales, employment etc.
Expansion R ET A IL M A R K ET S H A R E O F B EV ER A G E P R O D U C T S Sports Drinks Teas 2% Bottled W ater 3% 13% Fruit Drinks 16% Colas 66%
Recession Uncertain downfall. Controversies.Outcome- Decline in profits, sales etc.
Revival Turning point from depression into expansion. A result of New Innovation.
SWOT of PEPSICo. S- Strong brand name, corporate identity, Global distribution, New innovations. W- Health Issues, misleading advertisements. O- Growing demand, Expansion into new markets, faster growth. T- Competition from coke, legislation health scares like France and Belgium.
To conclude… As we have seen, a business cycle describes the phases of growth and decline in an economy. The goal of an economic policy is to keep the economy in a healthy growth rate -- fast enough to create jobs for everyone who wants one, but slow enough to avoid inflation. Unfortunately, life is not so simple. Many factors can cause an economy to spin out of control, or settle into depression. The most important, over-riding factor is confidence – Of investors, consumers, businesses and politicians. The economy grows when there is confidence in the future and in policymakers, and does the opposite when confidence drops. So a business cycle plays an important role in