2. Three Types of Business Cycle
Business Cycle Phases
Business Cycles as shifts in AD and AS
Business Cycle Methods
3. The business cycle occurs when economic
activity speeds up or slows down.
A business cycle is a swing in total national
output, income and employment, usually
lasting for a period of 2 to 10 years, marked by
widespread expansion or contraction in many
sectors of the economy.
4. Q Business cycles are the
irregular expansions and
Potential output contractions in economic
activity.
Actual output
t (in years)
5. Economic theory define three types of
business cycle:
Short-term (Kitchin) cycle: from 2 to 4 years,
it results from the changes in business
inventories.
Medium-term (Jouglar) cycle: from 7 to 11
years, it refers to new business investment.
Long-term (Kondratiev) cycle: from 30 to 50
years, it results from the technological
innovation.
6. A business cycle can be divided into
four major phases:
Recession – the downturn of a business cycle. This
is a period in which real GDP declines for at least 2
consecutive quarter-years.
Trough – the lowest point of real GDP at the end of
a recession.
7. Expansion (boom) is a period in which output
increases and approaches potential GDP or
perhaps even overshoots it.
Peak – the point at which recession begins, the
highest point in real GDP before a recession.
8. Business cycle generally occurs as a
result of shifts in the AD. Decline in the
AD lowers output and as a result of
downward shift in the AD curve, the gap
between actual and potential GDP
becomes greater during a recession.
9. P AS Characteristics of the recession:
QP
•Consumers purchases decline and
businesses react by holding back
AD
production. Real GDP falls.
AD1 Businesses investment also falls.
•The demand for labor falls.
•The prices of many commodities fall.
E
Wages are less likely to decline, but
P
they tend rise less rapidly.
P1 E1 •Business profit fall, because the
demand for credit falls, interest rates
0 Q1 Q generally also falls.
10. P AS
QP
AD1 The case of a boom is,
naturally, just the opposite
AD
of recession.
P1 E1
E
P
0 Q Q1 Q
13. Public distribution system: distribution of
essential commodities to a large number of
people
Fair price shops: Essential commodities are
being distributed as per the eligibility and rates
fixed by the Government
rationing: controlled distribution of scarce
resources
control of black marketing
Hoarding: Govt. controls the flow of money.
14. public revenue: In order to perform duties
and functions government require large
amount of resources, which are via Tax
revenue and Non-tax revenue
public expenditure: The expenditure incurred
by public authorities like central, state and
local governments to satisfy the collective
social wants of the people
Public borrowing
Financial administration