Business Cycle

GROUP – 5

Ankita Bobby
Apurv Sharma
Vineetha K.
Raghvandra Yadav
Rohit Pandey
Vaibhav 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
Potential output

Trend output
3
Real GDP

4
Actual
4 output
3 2
4
2 1
1 – TROUGH
2 – EXPANSION
1 3 – PEAK
4 – RECESSION

O
Time
 Features of Business Cycles
Variable Expansion Peak Recession Trough
Industrial Increase Rapid Decline Lowest
Production increase

Demand Increase Highest Decline Lowest

Prices Increase Rapid decline rapid decline

increase
Cost Increase Rapid Gradual Rapid decline
decrease decline

Investment Increase High Falls Falls rapidly

slowly
Employment Gradual Rapid Falls Rapid falls
increase increase

Bank credit Liberal Very liberal Falls Rapid falls

 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
 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 Cycles
 Political
► 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 Shocks
Technological


► 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