Transcript Four Phases of the Business Cycle

Four Phases of Business
Cycle
Business Cycle (or Trade Cycle) is
divided into the following four phases
Prosperity Phase : Expansion or Boom or Upswing of
economy.
Recession Phase : from prosperity to recession (upper
turning point).
Depression Phase : Contraction or Downswing of economy.
Recovery Phase : from depression to prosperity (lower
turning Point).
Peak—A high point at which the economy is at its strongest
and most prosperous.
Trough—The final stage in the business cycle; demand,
production, and employment reach their lowest levels.
Prosperity phase
• Prosperity phase - expansion of output, income,
employment, prices and profits, there is also a rise in
the standard of living
- full employment of resources
- high level of economic activity, it causes a rise in
prices and profit
- Boom Period.
• The features of prosperity are:
1
2
3
4
5
6
7
High level of output and trade.
High level of effective demand.
High level of income and employment.
Rising interest rates.
Inflation.
Large expansion of bank credit.
Overall business optimism.
Recession Phase
• Recession Phase - turning point from prosperity to
depression
• economic activities slow down
• when demand starts falling, the overproduction and future
investment plans are also given up
• steady decline in the output, income, employment, prices
and profit
• businessmen lose confidence and become pessimistic
(Negative)
• reduces investment
• expansion of business stops, stock market falls
• orders are canceled and people start losing their jobs
• increase in unemployment causes a sharp decline in income
and aggregate demand.
• Generally, recession lasts for a short period.
Depression Phase
• Depression Phase - a continuous decrease of output,
income, employment, prices and profits, there is a fall in
the standard of living and depression sets in.
• The features of depression are :
1
Fall in volume of output and trade.
2
Fall in income and rise in unemployment.
3
Decline in consumption and demand.
4
Fall in interest rate.
5
Deflation.
6
Contraction of bank credit.
7
Overall business pessimism.
Recovery Phase
turning point from depression to expansion
expansions and rise in economic activities
demand starts rising, production increases
and this causes an increase in investment
steady rise in output, income, employment,
prices and profits
revival slowly emerges into prosperity, and
the business cycle is repeated.
Influences on business cycle
• Business investment—High levels promote
expansion; low levels contribute to contractions.
• Money and credit—When interest rates are low,
businesses and individuals generally borrow
more money.(Converse is also true).
• Public Expectations—If consumers think
economy is heading toward recession, then they
will limit their spending.
Influences on business cycle
• External Factors—World economic and
political climate affect the business cycle
in the U.S.
– High oil prices of 1973, 1984, 2007.
– War affects the business cycle.