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INTRODUCTION
A trade cycle is composed of good
trade characterized by rising prices
and
low
unemployment
percentages, altering with
periods
of bad trade characterized by falling
prices and high Unemployment
percentages.
CHARACTERISTICS OF
BUSINESS CYCLE
1) The Business cycle generally
consists expansion and contraction.
2) Peaks and troughs are the turning
points of the cycles.
3) The pattern of cycles is irregular
and no two cycles are the same.
PHASES OF BUSINESS
CYCLES
ACC/ JOSEPH SCHUMPETER:There are four phases of Business
cycle:1) PROSPERITY.
2) RECESSION.
3) DEPRESSION.
4) RECOVERY.
Economic Phenomenon
ve l
o
a
Ab rm
no
Re
r
ces
e
n
sio
p
s
low al
ro
e
B rm
P y
D
no
e
t
p
i
res
io
n
Re
y cov
er
Peak
Expected
Line
Troug
h
T1
T2
T3
T4
Time Period
T5
PROSPERITY
1)It is also known as Expansion.
2)Production increases in all sectors of the
economy.
3)Increases the production and employment
opportunity increases.
4)Increases the purchasing power of the people.
5)There is a time lag before the producers can
produce
sufficiently to meet this demand in the
economy.
6)This leads to rise in prices.
PEAK
TH
W
O
GR END
TR
Time
Peak or prosperity
phase:
RECESSION
When the economy moves towards
recession there will be a substantial
fall in the production of goods and
services and the level of employment.
Business Inventories Starts
decreasing.
Movement of the economy is towards
backward.
General Price levels decreases.
RECESSION
TH
W
O
GR END
TR
Time
DEPRESSION
During this phase all the inventories
are
exhausted.
Employment is less.
Bank clearance is high.
Pessimistic Nature.
TROUGH
TH
W
O
GR END
TR
Time
RECOVERY
TH
W
O
GR END
TR
Time
Expansionary or recovery:
Real output in the economy is
increasing
Unemployment rate is declining
The upswing part of the cycle.
RECOVERY
In recovery , there is a tendency in
the
economy to move towards Normal
Price.
Investment starts rising.
Inventories have to be restored.
Employment increases.
These
actions
generate
the
four
Psychological theory:
Prof A. C. Pigou
Industrial Fluctuations Changes in psychology of
industrialists waves of optimism and pessimism.
He could not explain the cause of the changes in
psychology.
Overproduction theory: Socialist minded
economists
Several rival firms producing the same commodity
want to capture market => produce more stocks than
can sell => overproduction => prices fall => rise in
cost of production => marginal firms collapse =>
depression
CHARACTE
RSTICS
RECOVERY
BOOM
RECESSIO DEPRESSIO
N
N
Industrial
Production
Gradual
Increase
Rapid
Increase
Decline
Rapid
Decline
Commodity
prices
Gradual
Increase
Rapid
Increase
Decline
Rapid
Decline
Cost of
Production
Gradual
Increase
Increase
Rapidly, but
slower than
rise in prices
of goods and
services
Gradual
decline
Rapid
Decline
But slower
than
Commodity
prices
Profits
Satisfactory
level
High
Gradually
decline
Negligible
profits or
losses
Investment
Replacemen
t of
Existing
capital
equipment
High
Falls
slowly
Falls rapidly
Rapid
Starts
Falls rapidly
Employment Gradual
CHARACTE
RSTICS
RECOVERY
Wage rate
BOOM
RECESSI
ON
DEPRESSIO
N
Improvemen Rapid
t
Increase
But less than
rise
In prices of
goods and
services
Starts
falling
Falls rapidly
than the
Commodity
prices but
less
Bank credit
Liberal
loans
And
Satisfactory
demand for
Advances
Starts
falling
Falls rapidly
Bank
Reserves
Improvemen Rapid
t
Increase
Suffer a
set back
Falls rapidly
Discount
rates
A little
Rapid
Improvemen Increases
t
Suffer a
feedback
Falls rapidly
Speculation
Gradual
Minimum
Hardly any
Liberal loans
And high
demand
For advances
At high level
CHARACTE
RSTICS
RECOVERY
BOOM
RECESSI
ON
DEPRESSIO
N
Inventory
stocks
Gradual
decline
Very little
Gradual
Increase
High level
Business
failure
Smaller in
Number
Hardly any
Small in
Number
Large in
Number
Business
expectation
Optimism
Coupled
with
Cautions
decision
making
Highly
optimistic
Pessimisti
c
With
cautious
Decision
making
Highly
pessimistic
CHARACTE
RSTICS
RECOVERY
BOOM
RECESSIO DEPRESSIO
N
N
Industrial
Production
Gradual
Increase
Rapid
Increase
Decline
Rapid
Decline
Commodity
prices
Gradual
Increase
Rapid
Increase
Decline
Rapid
Decline
Cost of
Production
Gradual
Increase
Increase
Rapidly, but
slower than
rise in prices
of goods and
services
Gradual
decline
Rapid
Decline
But slower
than
Commodity
prices
Profits
Satisfactory
level
High
Gradually
decline
Negligible
profits or
losses
Investment
Replacemen
t of
Existing
capital
equipment
High
Falls
slowly
Falls rapidly
Rapid
Starts
Falls rapidly
Employment Gradual
Causes of Business
Shocks
and price stickiness
Cycles
{ Major innovations may trigger new investment
and/or consumption spending.
{ Fluctuations are driven by shocks. unexpected
events that individuals and firms may have trouble
adjusting to.
{ Short-run price stickiness is a major factor
preventing the economy from rapidly adjusting to
shocks.
{ The economy is forced to respond to shocks in the
short run primarily through changes in output and
employment rather than through changes in prices.
Causes of Business
Cycles
Supply and productivity shocks
{ Some economists believe supply shocks
caused by momentous innovations such as the
railroad, the automobile, microchips and the
Internet have a large impact on investment
spending and consumption spending and
therefore on output, employment, and the price
level.
{ Another school believes shocks to productivity
is the major cause of business cycles. When
productivity unexpectedly increases (falls), the
economy booms (goes into a recession).
Monetary shocks
{ Others view the business cycles as a purely
monetary phenomenon.
{ When a country's central bank shocks the
economy by creating more money than people
were expecting, an inflationary boom occurs.
{ By contrast, printing less money than people
were expecting triggers a decline in output
and employment, and, eventually, in the price
level.
Government Intervention:
EMPLOYMENT FLUCTUATIONS
FRICATIONAL UNEMPLOYMENT
Caused by constant changes in the
Labor market.
It occurs on account of two reasons
Employers are not fully aware of all
available workers and their job
qualifications.
Workers are not fully aware of the jobs
being offered by employees basic cause
of this is imperfect information.
STRUCTURAL UNEMPLOYMENT
Unemployment that arises from
structural
changes in the economy is called
structural unemployment.
This kind of situation arises when the
regional or occupational pattern of job
vacancies does not match the pattern
of
workers availability and suitability.
CYCLICAL UNEMPLOYMENT
Unemployment that occurs as a result
of a
general downturn in business activity is
known as Cyclical Unemployment.
Unexpected reductions in the general
level of demand for goods and services
are the
major cause of cyclical Unemployment.
DISGUISED UNEMPLOYMENT