BUSINESS CYCLES

Sunil Kumar

Introduction

Sunil Kumar

History shows that the economic do not grow in an uniform pattern. There may be several years of economic growth followed by a recession and in some cases even a prolonged depression. In course of time, the economy recovers and if the recovery is very strong it may lead to a boom. Prosperity may also lead to inflationary conditions marked by rising prices and speculation. An analysis of business cycles helps us to understand the relationship between real GDP, unemployment and inflation.

Characteristics of Business Cycles

A business cycle may be defined as a swing in total national output, income ad employment. It usually lasts for two to ten years and is characterized by expansion and contraction in many sectors. A business cycle has mainly two phases: recession and expansion. Peaks and troughs are the turning points of the cycles.
3

Sunil Kumar

The Business Cycle

Business Peak Recession

Trend line Boom Expansion or recovery

Contraction or depression

Recessionary through

Time Period
Sunil Kumar 4

Phase of Business Cycle

Prosperity
A

Above Normal

Recession
B C

Depression

Below Normal

Recovery

Time Period
Sunil Kumar 5

Theories of Business Cycles

Multiplier-Accelerator Theory Demand Induced Cycles Other Theories

Sunil Kumar

Multiplier- Accelerator Theory

According to multiplier theory, income is determined by investment. For a given level of aggregate output to be maintained, investment activity must be maintained at a certain level. The accelerator hypothesizes that current investment depends on the change in aggregate output from the previous year to the current year. To generate business cycles, two more ingredients are necessary : ceiling and floor
7

Sunil Kumar

Demand Induced Cycles

QP AS
AD1 P P1 AD

Business cycles can be understood better with the help of aggregate demand and aggregate supply

B
C Potential Output

Q1 Q Real Output
Sunil Kumar 8

Other Theories

Fiscal and monetary policies, which seek to combat cyclical movements arte called stabilization polices. They try to counteract reduction in private expenditure either by increasing public expenditure or by stimulating private expenditures through tax cuts, lower interests rates etc.
9

Sunil Kumar

Forecasting Business Cycles

Until the World War II, economic fluctuation were forecasted mainly with the help of data on money supply, consumption expenditure, savings, production in heavy industries etc. With the availability of statistical tools and computers, forecasting made great progress. Jan Tinbergen and Lawrence Klein, both Nobel laureates in economics did pioneering work in the field of econometric forecasting. An econometric model is a set of equations that uses historical data to study the behavior of the economy.
10

Sunil Kumar

Employment Fluctuations

The rate of unemployment is one of the key indicators of the economic conditions prevailing in an economy. Fluctuations in the rate of unemployment lead to partial changes in the economy. Unemployment arise form a deficiency in effective demand. Economists divide unemployment into three categories

Frictional Unemployment: due to changes in labor market Structural Unemployment Cyclical Unemployment

Sunil Kumar

11

The Concept of Full Employment

Full employment is widely used term in economics. Full employment does not mean zero unemployment. Economist define full employment as the level of employment that results when the rate of unemployment is normal. There is some natural rate of unemployment.
12

Sunil Kumar

Unemployment and Business Cycle

Recession Natural Unemployment Expansion Phase Boom Actual Unemployment

Year
Sunil Kumar 13

Nature and Trends in Unemployment in India

The nature of unemployment in India is mostly structural and disguised. It is associated with the inadequacy of productive capacity to create adequate jobs for those people who are able and willing to work. In India, not only is production much below acceptable levels, but it is also increasing at a very low rate. Because of rapid growth of the population, the number of people unemployed is increasing.
14

Sunil Kumar