1. BUSINESS CYCLES
Farala, Mary Ann Camille
Forbes, Camella Joy N.
Galanto, Lhenny Ann S.
Gueriva, Myrene Mae A.
III-ACSAD

2. Business Cycle
The term business cycle refers to
the recurrent ups and downs in the
level of economic activity, which
extend over several years.

3. Four PHASES OF BUSINESS CYCLE
PEAK
RECESSION TROUGH
RECOVERY
Level of business activity
Time

4. Level of business activity
PEAK
Time
Peak or Prosperity Phase
Highest period of economic growth
Real output in the economy is at a high level
Unemployment is low
Domestic output may be at its capacity
Inflation may be high

5. Level of business activity
RECESSION
Time
Recession or Contraction Phase
Economic slowdown
 Real output is decreasing
Unemployment rate is rising
As contraction continues, inflation pressure fades
If the recession is prolonged, price may decline
(deflation)
There is no precise decline in output at which a
serious recession becomes a depression

6. TROUGH
Level of business activity
Time
Trough or Depression Phase
Prolonged recession
Lowest point of real GDP
Output and unemployment “bottom out”
There is no precise decline in output at which a
serious recession becomes a depression

7. Level of business activity
RECOVERY
Time
Expansionary or Recovery Phase
Renewed economic growth
Real output in the economy is increasing
Unemployment rate is declining
The upswing part of the cycle

8. per year
Real GDP
Peak
Peak
Trough
One cycle Time

9. Indicators
• Economists use changes in a variety of
activities measure the business cycle, and
to try to predict where the economy is
headed.
• They include:
– Leading indicators
– Lagging indicators

10. LEADING INDICATORS
• Variables that change before real output changes.
They include:
Unemployment claims
Manufacturers’ new orders
Lagging INDICATORS
• Variables that change after real output changes.
They include:
Inventories to sales ratio
Outstanding commercial loans

11. characteristics
Wave like fluctuation
The periods of boom and depression occur alternatively.
It is recurring in nature
The four phases of trade cycle repeat themselves with some
sort of regularity.
No two trade cycles are identical
The cause, impact and periodicity of two trade cycles may not be same.
Steep wall towards depression
The upward movement towards boom is slow and steady. But the downfall is
steep, sudden and often violent causing disaster all round.
Synchronic in nature
Different phases of trade cycle occur almost simultaneously in different
industry.

12. characteristics
Expansion
• phase of high growth coupled with large investments,
• increase in employment, income and expenditure,
• but that is not all about it. Expansion also comes along with
inflation and competition.
Recession
• Recession is unwarranted and creates negative implications for the
economy.
• the basic problems - unemployment, excessive inventory, below
capacity operations and liquidation of firms.

13. Controlling business cycle
 During expansion firms gain, so desired phase & during recession
firms suffer, the unwarranted phase
 Take preventive & corrective measures to minimize their losses
during recession and to bring in stability in the economy
At Firm Level
 Investment – balanced mix of debt & equity
 Inventory – should not create large inventory, just-in-time strategy
is helpful
 Products – diversify in different markets & different
products, because in this way risk is also diversified
 Pricing – flexibility preferred. During recession prices may be
adjusted to increase demand
At Government level
 Monetary policy
 Fiscal policy