By Group 8

Anurag Rekhi
Arpitha S
George Pallath
Lakshmi Priya
Rohan Nair
Vishal Singh
A business cycle is an alternate expansion and
contraction in the overall business activity as
evidenced by fluctuations in the measures of
aggregate economic activity such as:
 Gross Product

 Industrial Production

 Employment & Income

 Cyclical & Periodic in nature
 Embraces the entire economy
 Cumulative & Self reinforcing
 Similar but not identical
 Major Cycles: 8-10 years
 Minor Cycles: 2-3 years
 Long Waves Cycles: 50-60 years
 Level of economic activity

Time
line
Full
Employment
The lowest point of a business cycle is known as Depression and is
characterized by:
The phase of transition from a pessimist economy
to an optimist economy is termed as
Revival/Recovery.
 Banks expand credit

 Production slowly increases

 Demand for capital, raw material and labour

also increases
 Inventions and innovations characterize this

phase
The prosperity(Expansion) phase refers to a state
where the economy attains maximum growth with
full employment and the movement of the economy
is beyond full employment.
 The investment activity picks momentum

 Stock markets start functioning vigorously

 Prices & Profits also rise influencing further

investment
 Economy experiences Full employment
 Attracted by high profits, businessmen increase
investment activities
 Additional pressure on existing resources
which are fully employed
 Sharp rise in prices
 Costs gradually rise and overtake prices and
profits
 Economy plunges into darkness
The transition from boom to depression is called
Recession.
 Profits decrease so business activities reduce

 Unemployment increases

 Demand decreases

 Income, expenditure and prices decrease

 Leads to a decline in overall business activity

 Boom

Full
Level of economic activity

Employment
line
Re
ce s
sio

ival

Prosperity
n

Rev

Depression
Time
CAUSES OF
BUSINESS
CYCLES
Revival
Expansion

BOOM

Recession
Depression
Innovation in business is the main cause of
increase in investments & business fluctuations.
Multiplier Theory
- Propounded by Keynes
- Autonomous Investment: Investment
undertaken due to new production
techniques, new markets etc.

Accelerator Theory
- Propounded by Clark
- Derived Investment: Increased income leads to
higher demand thus forcing more investment
to meet the demands.
ASSUMPTIONS:

No excess productivity
No government interference or foreign trade
1 year lag between income and consumption
Lag between consumption and investment

Income of any year can be estimated by knowing the incomes

of
the previous two years, marginal propensity of consumption
and the output-to-capital ratio.
Autonomous investment is a function of
current output
Induced investment depends on the
equilibrium growth rate
The income is bounded by a ceiling and a floor
SAMUELSON’S MODEL HICKS MODEL
Simple in nature Complex in nature
Unrealistic & does not Real world theory
confirm with the real
world Autonomous
Assumes capital-output investment as a function
ratio constant of current output
Equilibrium rate of
Fixed rate of growth- Rate of
autonomous investment autonomous investment
& savings and savings
Both models use the same consumption function – 1 year lag between income
and consumption
PREVENTIVE MEASURES RELIEF MEASURES

 Avoid undue increase  Reduce the costs of

in investment production
 Avoid decrease in  Profit ploughing
production and  Adopt cyclical pricing
maintain steady policy
employment  Improve the quality of
 Do not stock excess goods to increase
inventories demand
 Monetary measures

 Fiscal measures
- Taxation measures
- Public expenditure
- Borrowing

 Administrative measures