AS Economics

PowerPoint Briefings 2006

The Economic Cycle

tutor2u

What is a business cycle?

Mrs G

Syllabus aims within Business Cycle

You must be able to

Identify the phases of the business cycle
Identify the causes of Business cycle
instability, (durables, stock levels and
investment decisions)
Explain the Theories Of Business Cycle
How to control Economic Cycle
Mrs G

Business Cycle & Long term trends

Mrs G

Definition of Business Cycle

According to J.A.Estay:
Business cycles are fluctuation in general business
activity that appear through the inter-related of
many specific cycles.
According to Prof. Kenynes:
Trade Cycle is composed of periods of good trade
characterized by rising price and low unemployment
percentage altering with periods of bad trade
characterized by falling price and high
unemployment percentage.
In Simple words:
Business Cycle is a fluctuation of the economy
characterized by periods of prosperity followed by
periods of depression.
Mrs G

According to Joseph Business Cycle has 4 steps...

BOOM/Expansion/Prosperity:
The peak activity level of business or economy is
called Boom.
Recession:
The rapid decrease in the business activity level
is called Recession.
Depression/Contraction:
The lowest stage/level of business or economic
activity is called depression.
Recovery/Revival:
The gradual increase in business activity is called
Revival.
Mrs G

Phases of Business Cycle:

Mrs G

Key Concepts G.D.P

Gross Domestic Product:

The value of output of goods and services produced in the
country during one year
Includes all Primary, secondary and tertiary sectors
Can be viewed as being national income, national output
or aggregate demand (AD)
GDP per capita GDP divided by the population (GDP per
head)

All countries experience economic cycles

with their G.D.P

Mrs G

Characteristics of an Economic Boom

Strong and rising level of AD

Often driven by fast growth of consumption
Rising employment and real wages
High demand for imported goods & services
Government tax revenues will be rising
quickly
Company profits and investment increase
Increased utilisation rate of existing
resources

Mrs G

Business and a Boom!

A boom occurs when national output is

rising at a rate faster than the trend rate of
growthi.e. faster than Govt expects!
It is characterised by HIGH consumer
spending, high business confidence,
investments and profits!
There is a lot more output.

Mrs G

In a boom, what happens to .

Growth?
Consumer spending?
Employment?
Business confidence? Would you INVEST
or rationalise in a Boom?
Consumer confidence? Would you spend,
invest or borrow in a boom?

Can you
explain why?
Mrs G

Characteristics of an Economic Recession

Declining aggregate demand for a economy
output
Contracting employment / rising
unemployment
Sharp fall in business confidence & profits
Decrease in fixed capital investment
spending
Reduced inflationary pressure
Falling demand for imports
Increased government borrowing
Lower interest rates from central bank
Mrs G

Recession

In a recession what happens to

Growth?
Consumer spending?
Employment?
Business confidence?
Would you INVEST or rationalise in a
downturn/slump?
Consumer confidence?
Would you spend, invest or borrow in a
downturn/slump?
Mrs G

The recession of the early 1990s

Mrs G

Depression...
When there is a continuous decrease of
output , income , employment , prices
&profits , there is a fall in the living standard
of people n depression sets in.
A phase of the business cycle in which the
economy as a whole is in decline. More
specifically, contraction occurs after the
business cycle peaks, but before it becomes
a trough. According to most economists, a
contraction is said to occur when a country's
real GDP has declined for two or more
consecutive quarters.
Mrs G

Characteristics of Depression...

Mrs G

Fall in volume of output and trade.

Fall in income and rise in unemployment.
Decline in consumption and demand.
Fall in interest rate.
Contraction in bank credit.
Deflation.
Overall business pessimism.
Fall in MEC and Investment

Recovery...
The turning point from depression to
expansion is termed as recovery.
In the revival stage of the business cycle,
consumers start to feel more confident that
the worst is behind them and they start to
spend again. Economic indicators like the
GDP start to move higher after long periods
of decline, employment numbers start to
look good again, some businesses start to
spend more money again.

Mrs G

Characteristics of Recovery or Revival..

There are expansion & rise in economic
activities.
Demand rise increases in production &
investment.
Steady rise in Output , Income, Employment
, price & Profit.
AD increases.
The banks expand Credits.

Mrs G

Various Theories Of Business Cycles:

Over-Investment Theory
Innovation Theory
Keyness Theory

Mrs G

Over-Investment Theory...
The economy comes out of its downswing
as income increases and people revert to
earlier consumption and expenditure levels.
This helps economy to recover and the
upswing starts again. This theory says that
the over investment due to forced saving by
people in inflation is the cause of
fluctuations in economic activities. Hayek
says, voluntary saving leads to change in
structure of production permanently but
forced saving brings changes which are not
permanent
Mrs G

Innovation Theory...
Joseph Schumpeter has explained the
expansion and contraction through industrial
innovation. In this theory, Schumpeter says,
any innovation can move the economy to
disequilibrium from equilibrium and this will
continue till the new equilibrium position is
reached.

Mrs G

Keynes theory..
According to keynes in the short run, the
level of income, output and employment is
determined by the level of aggregate
effective demand. Aggregate demand is
composed of demand for consumption
goods and demand for investment goods.
J.M. Keynes is of the view that it is the
changes in the level of aggregate demand
which bring about fluctuations in the level of
income output and employment.

Mrs G

Characteristics Of Business Cycle:

1. Fluctuations of aggregate economic activity.
2. Cycles Expansion/Boom and
Contraction/Recession and Peak and Trough: They
are the turning Points of the business cycle.
3. Co-movements of many macro variables over the
business cycle.
4. Business Cycles are Recurrent but not periodic.
5. Persistence of economic activity.
Mrs G

Causes of the Business cycle fluctuations

Changes in business confidence.

Alternating periods of stocking & destocking.
Changes in the amount of spending on
large consumer items.
Changes in govt policy.

Mrs G

Measures to Control Business cycle:

Prohibitive Measures

Curative Measures

Mrs G

Measures to Control Business cycle:

(contd)
Prohibitive Measures:
In prohibitive Measures, it is tried to not
start a Business Cycle. It means to take
some initial measures so that the business
cycle could not start, and economy could
not affect from its dangerous effects

Mrs G

Measures to Control Business cycle:

Curative Measures:
1. Fiscal Policy:
2. Monetary Policy:
3. International Theory:

Mrs G

Fiscal Policy:
Fiscal Policy is the means by which a
government adjusts its levels of spending in
order to monitor and influence a nation's
economy.
In a recession, governments stimulate the
economy with deflect expenditure exceeds
revenue).
During period of expansion, they restrain a
fast growing economy with higher taxes and
aim for a surplus (revenue exceeds
expenditure).
Mrs G

Monetory Policy:
The actions of a central bank, currency
board or other regulatory committee that
determine the size and rate of growth of the
money supply, which in turn affects interest
rates.
Monetary policy is maintained through
actions such as increasing the interest rate,
or changing the amount of money banks
need to keep in the vault (bank reserves).

Mrs G

International Theory:
Different measures have been suggested
by the economists to control the business
fluctuations effectively. Such as:
(a). Control of international production.
(b). International bill stock control and
international investment control.

Mrs G

Quick Questions

What stage of the business cycle do you

think the Pakistani Economy is in now?
How is the business cycle measured?
Why does Investment fluctuate more than
consumption in the business cycle?
What 2 ways might a business benefit from
a recession?
Mrs G

THANK YOU So
MUCH

Mrs G