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

Peak
Recession

Co
ntr
Co

act
nsion
ntr

ion
Con

act

Expa
io
sion
t
ract

n
n
ion

Expa

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.