Introduction to Business Cycles

Professor & Lawyer

Puttu Guru Prasad
Senior Faculty for
Management Studies -
VVIT
 The Business
Cycle BUSINESS CYCLES
LG5

Business Cycles -- Periodic rises and falls that occur in

economies over time.
Four Phases of Long-Term Business Cycles:
1. Economic Boom
2. Recession Two or more consecutive quarters of
decline in the GDP.
3. Depression A severe recession.
4. Recovery When the economy stabilizes and starts to
2-4

grow. This leads to an Economic Boom.

 Features of Business Cycles
Variable Expansion Peak Recession Trough

Industrial Production Increase Rapid increase Decline Lowest

Increase Highest Decline Lowest

Demand
Increase Rapid increase decline rapid decline
Prices
Increase Rapid decrease Gradual decline Rapid decline
Cost
Increase High Falls slowly Falls rapidly
Investment
Gradual increase Rapid increase Falls Rapid falls
Employment

Liberal Very liberal Falls Rapid falls

 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
A business cycle is identified as a sequence of four phases:
Contraction (A slowdown in the pace of economic
activity)
Trough (The lower turning point of a business cycle,
where a contraction turns into an expansion)
Expansion (A speedup in the pace of economic activity)
Peak (The upper turning of a business cycle)
What does a model of the
business cycle look like?
The Business Cycle: diagram
Peak
Growth Recession

GDP

Trough or
Depression

TIME
 Business Cycle : Diagram

Expansion Recession Expansion

Peak
Total Output

Secular
growth
trend
Trough

0
WHAT ARE THE PHASES OF THE BUSINESS
CYCLE AND THE CHARACTERISTICS OF
EACH?
PHASES OF THE BUSINESS CYCLE

Expansion/Growth: During this phase of

the business cycle, consumer and business
spending rise.
Peak: After a period of growth, an
economy will reach a peak, where business
is producing at or near full capacity, and the
economy is at or near full employment.
 Indicators of Business Cycles

There 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
Recession

Recession: This is a phase

when real GDP begins to
decline. Consumers and
business reduce their spending,
unemployment rises,
investment declines, and
pessimism about the economy
is likely to grow.
Recession
Trough/Depression

Trough/Depression: This is
the lowest point of the
business cycle. Factories will
be operating below capacity,
allowing unemployment to
reach high levels
 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.
 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.
 CAUSES OF BUSINESS CYCLES

External factors
1. Inventions and innovation: Major changes in
technology can influence the business cycle.
Usually technological changes move the
economy in a positive direction, but this is not
always so.
2. Wars and political events: The impact of such
events on the economy are very fact specific- in
other words, difficult to generalize about.
A THOUGHT ON THE BUSINESS CYCLE

The business cycle tends to be self-

sustaining. In other words, when in a
period of growth, the economy will
continue to grow (jobs leading to jobs)
until some event (internal or external)
intercedes.
 A Good Cycle

More
More
goods
spending
produced

More
jobs
A Bad Cycle

Less Fewer
Spending Jobs

Fewer
Goods
Produced
GOVERNMENT AND THE BUSINESS CYCLE

In order to prevent the economy from

running too hot (inflation) or too cold
(recession/depression), the
government often becomes involved in
efforts to try and stabilize the
economy.
The government has two major tools to try
and stabilize the economy and achieve its
goals: fiscal policy and monetary policy.
 FISCAL POLICY

Fiscal policy is the taxing and spending

decisions that are made by the President
and Congress.
Fiscal policy actions of the government
fall into two general categories:
1. Raise or Lower Taxes
2. Increase or Decrease Government
Spending.
 FISCAL POLICY
During a Recession
The Government can
Lower taxes and/or
Increase spending
These actions boost the economy by putting
more money in the hands of people so they can
spend it.
This is called Expansionary Fiscal Policy
Example of PEPSICo India Business
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
RETAIL MARKET SHARE OF BEVERAGE PRODUCTS

Sports Drinks
Teas
2%
Bottled Water 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.