Business CycleGROUP – 5

Ankita BobbyApurv SharmaVineetha K.Raghvandra YadavRohit PandeyVaibhav Joshi

Business Cycles► The pattern of real GDP rising and then falling is called

Business Cycle.

► The value of real GDP over time shows periodic fluctuations in its movement.

► It is the recurrent swings in the real GDP which follows a wave like pattern.

The four phases of business cycle :

► Trough

► Expansion

► Peak

► Recession

The business cycle

O

Real

GD

P

Time

1

2

3

1

2

3

4Actual output

Trend output

4

4

Potential output

1 – TROUGH2 – EXPANSION3 – PEAK4 – RECESSION

Features of Business CyclesVariable 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

Bank credit Liberal Very liberal Falls Rapid falls

Indicators of Business CyclesThere are variables other than real GDP that influence the business cycle. They are classified into three:

(1) Leading Indicators: generally change before real GDP changes.

Can be used to forecast future output.

(2) Coincident Indicators: tend to change at the same time as real output changes

eg: as real output increases employment and sales rise

Ref: MB p.136

Indicators of Business Cycles(3) Lagging Indicators: do not change until after the value

of real GDP has changed

eg: as output increases, jobs are created, more workers are hired, and as a result unemployment falls.

All these three groups of indicators are used together to identify the peaks and troughs in business cycles.

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.

Sources of Business CyclesPolitical► if politicians manipulate the economy for electoral

advantage

For example: loose fiscal policy before elections in order to manipulate demand; tight fiscal policy after elections

Psychological (Speculative)► Changes in expectations about future profits are more

important (bursting of bubbles – dot com, sub-prime crisis, etc.)

Reasons for ShocksTechnological► Technological shocks as the main reason (innovation, oil

price increase, safety regulations etc.)

External► One country’s exports are another country’s imports,

therefore, the demand for imports mostly depends on the other country’s income (e.g., oil price shocks)

Unpredictable factors► Cyclical movements can also caused by highly

unpredictable factors such as drought, contraction of exports, etc.

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.

Business cycles► Economic Depression: is a prolonged period of severe

economic contraction/recession

► Economic Recession: “a period of significant decline in total output, income, employment, and trade lasting from six months to a year, and marked by widespread contractions in many sectors of the economy” (NBER)

“Two consecutive quarters of declining real GDP”

Characteristics of an Economic Recession

► Declining aggregate demand for output ► Contracting employment / rising unemployment► Sharp fall in business confidence & profits ► Falling demand for imports► Increased government borrowing ► Lower interest rates from central bank

GLOBAL RECESSION “when US sneezes , the rest of the world catches cold”

► The United States accounts for one-fourth of the world GDP and any significant slowdown is bound to have reverberations elsewhere.

How recession affected India ► The sectors least affected (directly) by the slowdown

are Pharmaceuticals, FMCG, Media & Entertainment.► Those which will feel a moderate impact of the global

crises are Power, Automobiles, Retail, Hospitality and Tourism.

► The sectors most severely affected are Banks, Financial Services, Real Estate, Infrastructure and Information Technology.

► In terms of specific sectors, the IT Enabled Services sector was a hit since a majority of Indian IT firms derive 75% or more of their revenues from the United States.

► A recession in the United States has seen the loss of some jobs in India.

► Banks have suffered huge losses including the public sectors like PNB,BANK OF INDIA etc:- as they had exposure to instruments issued by Leyman and Merill Lynch.

► The exports to US have dropped by 30 % which will lead to an affect on indian economy.

How recession affected India

► FICCI (Federation of Indian Chambers of Commerce & Industry) found that with global recession, inventories industries like garments, gems, jewellery , textiles and chemicals had cut their production by 20 % to 50%

► 5 lakh people had lost their jobs in the manufacturing industries.

► The real estate also faced problems, where the developers are finding it hard to raise finances.

Measures to counter recession FISCAL POLICIES : Government influences the

economy by changing how it spend and collects money.

► Tax rate cuts for business or individual.

►More spending by the government to create jobs.

Measures to counter recession►MONETARY POLICIES : Central Bank manipulates the

available supply of money in the country.

► Reduce reserve ratios

► Lower the interest rates.

► Open market operations

Thank You