Business cycles

Session 18

A business cycle can be defined as a

swing in total national output ,income
and employment.

Changes in aggregate demand can have a

powerful impact on the over all level of
output, employment, and prices in the
short run.

Phases of Business Cycles

In broader terms, there are four
stages or phases in the business
cycle:
1.
2.
3.
4.

Prosperity
Recession
Depression
Recovery

 Prosperity

is also known as

expansion.
The gap between the costs and the
prices is an important factor in
expansion.
With the widening of the gap, there
is a whole possibility of producers
producing more.
This results in more employment
opportunities, increasing the
purchasing power of the people

In the early stages, the gap between costs

and price is high and this encourages the
entrepreneurs to expand their businesses.

In course of time as cost increase relative to

price, profit margins come down. As a
result, the expansion activities slow down.

Further, new projects are cancelled creating

unemployment.

The
persisting
depression.

With the moving of economy towards

depression there would be a drastic fall in
the output, unemployment and fall in
general price level.

recession

results

in

 The

Great Depression took place

from 1930 to 1939.
During this time the prices of stock
fell 40%. 9,000 banks went out of
business and 9 million savings
accounts were wiped out.
86,000 businesses failed, and
wages were decreased by an
average of 60%. The unemployment
rate went from 9% all the way to
25%, about 15 million jobless
people

In the process of recovery, the first step

is the stop in the price fall
Companies start using their idle
capacities, production picks up resulting
in more employment opportunities.
In the long run, it would result in upward
movement in the prices, encouraging
investment and growth in the economy

Multiplier-Accelerator
This theory is based on the interaction
Theory
between multiplier and accelerator.

Accelerator principle, says that rapid output

growth stimulates more output growth.
This process continues till the economic
growth reaches a point from where the
economy growth rate slows down.
For a constant volume of investment to be
maintained, output must grow at a certain
rate.

Economic indicators
Economic indicators are economic
statistics that indicate the present
and future state of an economy.
The economic indicators can be used
to identify the rate at which the
economy is growing and also
predict the economys future
growth rate.
The list of economic indicators is
very large because any economic
statistic that indicates the
economic growth of nations can be
qualified as an economic indicator.

Features of economic
indicators
1.

Related to Business

2.

Cycle/Economy
Frequency of the Data
Timing

3.

Related to business
cycle/economy

1.
2.
3.

With relation to business cycle, economic

indicators may be classified into:
Procyclic
Countercyclic
Acyclic

 Economic

indicators that move in the

same direction as that of the changes
in business cycle are known as
procyclic economic indicators.
These indicators show an increasing
trend when the economy is in boom
period and show a decreasing trend
when the economy is under
recession.
Example: The gross domestic product
of a country increases during boom
period and decreases during
recessionary period.

Counter cyclic
Economic indicators that move in the
opposite direction as that of the changes in
the business cycle are known as counter
cyclic economic indicators.
These indicators show decreasing trend
during boom periods and show an increasing
trend during recessionary periods.
Example: The unemployment rate of a
country decreases during boom period and
increases during recessionary period.

Acyclic
Economic indicators that do not establish
a relationship with the changes in the
business cycle are known as acyclic
economic indicators.
Example: The income distribution among
the people of the economy does not have
any relationship with the changes in the
business cycle.

Frequency of the data

Economic indicators may also be
classified depending upon the frequency
with which they are released.
E.g.: some indicators like unemployment
rate are released every month in certain
countries. Some indicators like stock
indices change every minute.

Timing

Depending upon the timing, economic

indicators may be classified into:
Leading indicators
Lagging indicators
Coincident indicators

Leading indicators
Economic indicators that change before the
occurrence of changes in the economy are
known as leading economic indicators.
These indicators indicate an increase or
decrease in the economy at future date by
showing a decrease or increase in the
numbers.
For instance, the stock market indices begin
to decline prior to the recession in an
economy.
These indices also show an improvement
before the economy really begins to pull out
of a recession. Leading economic indicators
hold great value to investors, as these
indicators help them in making investment
decisions.

Lagging indicators

Economic indicators that change

following a given trend of an economy are
known as lagging indicators. These
indicators do not forecast but only
confirm the long-term trends. For
instance, the unemployment rate
increases consequent to the decline in
the economy.

Coincident indicators

An economic indicator that moves along

with the economy i.e. that moves in
tandem with the economy is known as a
coincident indicator.
For instance, the GDP of a nation
increases or decreases along with the
changes in an economy, thus GDP can be
termed as a coincident indicator.

classification

Classification of economic indicatorsFor

our convenience sake, these indicators
can be classified into three groups. They
are:
General indicators
Business indicators
Consumption indicators

General indicators

GDP
Inflation
Interest rates
Unemployment rate
Foreign exchange reserves
International trade

Business indicators

The

various business indicators

discussed in this chapter are:
Industrial production
Capacity utilization
Wholesale price index/producer
price index
Consumer price index
Retail sales
Construction spending

Consumption indicators
The various consumption indicators discussed
in this chapter are:
Consumer confidence index
Employee cost index
Building permits
Personal income
Income distribution
Fixed investment