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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. • The cycle of economic growth and decline. There are four stages in the business cycle: expansion, growth, contraction and recession. • The rhythm / periodicity between the cycles need not be similar pattern.
THE BUSINESS CYCLE Phases of the Business Cycle PEAK RECESSION TROUGH RECOVERY GROWTH TREND Level of business activity Time
Phases of the Business Cycle • Expansion - increase in production and prices , and low interests rates. • Crisis - stock exchanges crash and bankruptcies of several companies occur. • Recession - decrease in price and in output, high interests rates. • Recovery - stocks recover thanks to the fall in prices and incomes.
A review of early predictionIndia's business cycle to peak in 4 yrs • Current business cycle, -began from a peak in 1998, touched a trough in ’04. • Since 1982, productivity growth has been driven by services followed by industry and agriculture, unlike the rest of Asia where growth was driven by manufacturing. • was expected to peak again in 2010 after 5 1/2 to 6 years. • The economy growth rate will have a close to 8% average real GDP growth rate. The economy is expected to join the $1trillion club now.
CHARACTERESTICS • A minor business cycle has duration of 3 – 4 years, when 2 – 3 these cycles combines forms major business cycle of 6 – 12 years. • In prosperity, business activity is usually 10% to 25% > than long-term trend, in depression 5% to 25% below. • Prosperity takes twice as much as the depression. • Phases are same in all cycles. • If the boom is high, continuous depression will be also severe but need not to be vice versa.
Other Characteristics • General price level changes will be there before changes appear in wholesale price or total production. • After this prices of stocks, shares, wholesale prices, production volume changes. Then interests & wage rates will be manifested. • Raw material prices alteration comes , then FG follows. • Normally, Retail prices lag behind the wholesale prices.
RECOVERY • Economic activity (Prices) increases slowly • Gradual increase in production, employment. • Release of stocks & loan repayment. • Expansion in business, banks rules will be liberal. • Prices will reach its normal level due to Optimism in business & fresh public investments. • Additional demand for products.
PROSPERITY • Cumulative moment of prices, employment, income & production. • Rapid output growth, increase in price, output, raw material & interest rate. • High investments(also stocks), peak may lead to inflation. • Consumption fails, piling up of inventories due to lag in sales. • Followed by pesimissim downturn of cycle starts.
recession • A recession is a contraction phase of the business cycle, or "a period of reduced economic activity.“ • A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP growth, real personal income, employment industrial production, wholesale & retail sales. • CRR to deposit ratio falls. • Production & employment falls, inventory stocks get accumulated. • The peak of this will be depression.
DEPRESSION • Graduall falling of prices leads to employment & demand increases. • Producers suffers a lot due to stock clearance, low prices, idle bank funds, mass employment and slack trade. • General demand falls faster than production of goods. • Slowly depression ends by reduce in cost, demand for loans, CRR to deposit ratio raises, production increase. • Cycle continues.
