Business Cycle And Business Policies

Business cycle and Business Policies

What is Business Cycle? The term Business cycle (or Trade cycle?) refers to the fluctuations in economic activities that occur in a more or less regular time sequence in all capitalist economies.

What is….cont… Economic activity is measured by several indicators, e.g. *Volume of employment *Volume of output *Income *Price level When these indicators are plotted on a chart, the graph looks like a wave. This shows that economic activity rises and falls in more or less a regular fashion.

What is….cont… *In the past, there have been regularly recurring waves of business expansion and contraction in the industrialized countries of the world. *However, these waves are only roughly similar No two business cycles are identical; yet they have much in common. They are not identical twins but they are recognizable as belonging to the same family Paul A. Samuelson Economics, TMG,p.239.

Can a fluctuation in one industry amount to cyclical fluctuation? It is not the existence of ups and downs in the rate of activity in particular industries that constitute business cycles but rather the fact the timing of these fluctuations tends to be roughly the same in many areas of business activities.

Phases of business cycle Peak

Expa n

ion act ntr Co

n

ion ract

Expa nsion

Recession io act ntr Co

t Con

sion

Peak

Revival Revival Through

Through

Phases…cont… Alternatively these phases are also called *Prosperity *Crisis *Depression *Recovery

Phases…cont… The essence of the business cycle is a cumulative upward sweep of income, production, employment and prices (revival and prosperity) which gradually levels off and culminates in a turning point (sometimes a crisis), followed by a cumulative downward sweep (recession and depression) which in turn gradually levels off and culminates in a turning point upward.

Phases…Expansion Expansion is a period in which majority of the significant economic indicators are rising or expanding. *A spurt in consumer durables growth, e.g. items like refrigerators, air-conditioners, wrist watches, passenger cars in normally a prelude to a general economic upturn.

Phases…Recession Recession is generally understood as a state in which there is deceleration in the economic activities resulting in cuts in production and employment, accumulation in stocks and a fall in prices (may not necessarily so: STAGFLATION)

Why recessions have become tamer? Swaminathan S. Anklesaria Aiyar, Times of India, May 13, 2001, p.12. 1. Faster and substantial growth of services 2. Growing computerization 3. Growing mechanization of industries *Services are more recession-proof than industries (Why?) *Computerization helps industry to manage production with less inventories *Mechanization greatly reduces the labour content of industry. Some decades ago cars and steel were the two biggest employers globally. Today labour constitutes only 2.4 per cent of the value of a Maruti car, and less than 2 per cent of the value of steel from Essar. So, when demand falls, there is much less labour to retrench. Bankruptcy puts fewer people out of work. This diminishes the pain and depth of the business cycle.