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The Business Cycle

or
The Economic Cycle
Marallag, Ellaine
Paderanga, Franzel
San Diego, Jann Kyle

What is a business cycle?

A business cycle refers to periods of


expansion and contraction. The first and
primarymeaning of business cyclerefers to
fluctuations in economic output that an
economy experiences over a long period
oftime. Factors such asgross domestic
product (GDP),interest rates, levels of
employment and consumer spending can
help to determine the current stage of the
economic cycle.

According to Arthur F. Burns and Wesley


C. Mitchell..

Business cycles are a type of fluctuation found in the


aggregate economic activity of nations that organize
their work mainly in business enterprises.

A cycle consists of:


Expansions.
General recessions.
Contractions
And revivals which merge into the expansion
phase of the next cycle.

Theories of Business/Exonomic
Cycle

Keynesian Theory
Fluctuations inaggregate demand
cause the economy to come to short
run equilibrium at levels that are
different from the full employment
rate of output. These fluctuations
express themselves as the observed
?
business cycles.

How we measure business cycle ?

The business cycle is the periodic but irregular up-anddown movements in economic activity, measured by
fluctuations in Real GDP and other macroeconomic
variables.

Theories of Business/Economic Cycles


Exogenous

Theories forces outside the economic

system create the business cycle.


Forces: wars, political developments, natural disasters, or major
innovations.

Theories of Business/Economic Cycles

Endogenous Theories forces within the


economic system cause the fluctuations in the
economy.
Forces : Accelerators , multipliers, innovations or
monetary policies.

Business/Economic Cycle

Business Cycle

The Business Cycle


Prosperity/Boom/Peak

Growth
/
ssion
Rece action
r
C ont

Reco
v
Expa ery/
nsion

Business
Activities

Depression/Trough
/Slump
Time

PHASES OF BUSINESS
CYCLE

Peak

Re
ce
ss

on
i
s
n
pa
x
ERIT
E
P
S
PRO
Y

IT
R
E
P
S
PRO
Y

io
n

Line of cycle

Ex
pa
ns
Recov
ery
io
n

Steady growth line

DEPRESSIO
N

Trough

Boom/Prosperity
The

business outlook is extremely optimistic.


The important features of prosperity are:
a high level of output ,trade, employment and
income,
a high level of effective demand and high
marginal efficiency of capital,
a large expansion of bank credit, and
a rising trend in prices, profits and interest rates.

PEAK

Highest level of prosperity


The phase of recession
begins

Recession
During recessions, many macro economic
indicators vary in a similar way.
Production, as measured by gross domestic
product (GDP), employment, investment
spending, capacity utilisation, household
incomes, business profits, and inflation all
fall
while bankruptcies and the unemployment
rate rise.

What causes recession?

Decrease in spending by
consumers due to lack of
faith in the economy

Which perpetuates the


cycle due to limited
spending

Less consumption would


mean decline in demand
for products

Which leads to high


levels of unemployment

Which leads the


manufacturers to cut
down on production

Lower production would


lead to job cuts

Downward slide in
growth rate becomes
rapid and steady
RECESSIO
N

Output, employment,
prices etc. register a
rapid decline
When the growth rate
goes below the steady
growth rate depression
sets in

Depression/Trough

The phase of depression economic activity is at


its low . Wages, cost, price are very low.
There is massive unemployment leading to a
fall in the aggregate income of the people.
This brings down the purchasing power of the
community.
General demand falls faster than production.
The piled-up stock are sold at very high rates of
discount leading to heavy loss to the firms.

Depression begins when


Growth is less than zero

DEPRESSIO
N/TROUGH

Total output,
employment, prices, bank
advances etc. Decline
during subsequent period
Depression lasts as long
as growth rate stays
below the stagnated
growth rate

Phase during which the


downward trend in the economy
slows down and eventually stops

TROUGH

Economic activities once again


register an upward movement
Period of severe strain on the
economy
Economy registers a continuous
and rapid upward trend in
output,employment, etc.
It enters the phase of recovery

Recovery
The

rising price of an asset


Increased economic activity during a business
cycle, resulting in growth in the gross domestic
product.
Collection of all or a portion of a debt
previously considered uncollectible.
Valuable materials remaining after processing.
Proceeds from the sale of an asset that
represent depreciation that has already been
taken.

Increase in
Output
Employment
Investment
RECOVERY
&
EXPANSION

Aggregate
demand
Bank credits
Wholesale &
Retail prices
Per capita output
Standard of living

RECOVERY &
EXPANSION

In the recovery phase the


growth rate may still
remain below the steady
growth rate.
When it exceeds this rate,
the economy enters the
phase of expansion And
prosperity

The Business Cycle


Prosperity/Boom/Peak

Growth
/
ssion
Rece action
r
C ont

Reco
v
Expa ery/
nsion

Business
Activities

Depression/Trough
/Slump
Time

Effects of Business Cycles

During bad economic times like recession and


depression, various sectors are affected In different
ways:
Those who produce capital goods are greatly affected in
terms of production and employment.
Firms have no reason to buy capital goods when economic or
business activities are down.

Industries which produce consumer durables are


adversely affected during bad economic times.
Since consumers tend to be economical, both
production and employment fall.
Basic products which are non-durables, they are less
sensitive to recession or depression.

The Philippine Experience

The Philippine Experience


1984
The Philippine Economy turned from bad to worse.
Foreign loans did not come, dollars were difficult
to obtain and both domestic and foreign markets
declined.
The average inflation rate for 1984 was 50 percent.
As of the end of December 1983 to March 1984,
almost one million workers lost their jobs.

The Philippine Experience


On the other hand, there were groups who reaped
economic benefits from our economic crisis.
It has been claimed that a few rich Chinese
businessmen owned the black market and they
dictated the rates.
Likewise, foreign banks at the beginning of the
crisis in 1983 realized a 79 percent profit on their
investments.

Causes of the Recession


Economic recession in the industrial countries has
greatly affected our exports to said countries.
Since exports of raw materials and primary farm
products are the main sources of our dollar
earnings, their reduction has a great impact on our
developing economy.
Another reason was the increase in OPEC prices of
oil products.

Causes of the Recession


The UP Report pointed out authoritarianism and
crony capitalism as the roots of the existing crisis.
It can be said therefore, that economic
opportunities were not equal and the principle of
business efficiency was likely ignored.
Everything depended on right connections

Government Policies
The government has introduced economic
reforms or measures to reduce the problems of
inflation and unemployment and these have been
planned for economic recovery. Some of these
measures have been:
To increase the production of short-gestation
crops and other small-scale industries.
To reduce over-supply of money.

Government Policies
To reduce government expenditures through more
economical use of its resources.
To concentrate more on the development of less
expensive agricultural projects and have shorter
gestation than industrial projects.

Government Policies

To encourage more foreign investments to


accelerate our economic recovery.
To transform the people into more self-reliant and
productive groups.

Economic Recovery depends


on Government Officials
Honesty is one main reason why other countries
experienced success.
Attitudes and values should be favorable to the
economic growth.
Economic programs are useless if they are not
properly implemented.