VTU Notes for Economics for Managers, Business Cycles

1. MODULE 5
(Part 2)
BUSINESS CYCLES, INFLATION,
PRICE INDEX and SWOT Analysis

2. BUSINESS CYCLE
Why Business Cycle is important?
● Many free capatalist economies like US and
Britain have registered a rapid economic growth
during the last 2 centuries (200 Years).
● Economies should have a upward trend of GDP
in long run and in short run. Fluctuations in
economic activity like change in output, income,
employment and prices need to show positive
growth of the economy.

3. Meaning of basic terms
● Upswing: The period of high income, output
and employment in an economy, is called as
Prosperity, Expansion or Upswing.
● Downswing: The period of low income, output
and employment in an economy is called as
Contraction, Recession, Downswing or
Depression.

4. Meaning of Business Cycle
J M Keynes, writes, "A Trade Cycle is
composed of periods of good trade
characterised by rising prices and low
unemployment percentages with the period
of bad trade characterised by falling prices
and high employment percentages".
"THESE FLUCTUATIONS OF TRADE IS
CALLED THE BUSINESS CYCLE"

5. Meaning of Business Cycle
"The alternating periods of expansion and
contraction in economic activity is called
BUSINESS CYCLES or TRADE CYCLES".
● A Business Cycle fluctuations varies from a
minimum period of 2 years to the maximum
period of 10-12 Years.
● Business Cycle has 4 phases, comprising of
upswing and downswing, where the GNP
expands and contracts in the business
cycle.

6. 4 Phases in Business Cycle
('X axis is Time Period' and 'Y axis is Level of
GNP')
1. Expansion (Boom, Prosperity or upswing),
2. Peak (Upper Turning Point),
3. Contraction (Downswing, Recession or
Depression),
4. Trough (Lower Turning Point)

7. 4 Phases in Business Cycle
● If the contraction and expansion is in a straight
horizontal line it is a 'Business Cycle without
growth'.
● If the contraction and expansion is in a 45% line
it is a 'Business Cycle with growth'.

8. Features of Business Cycle
1. Business Cycles occurs periodically, (2 Years
to 10-12 Years),
2. Business Cycles are SYNCHRONIC. (It is for
the entire economy and not a single firm),
3. Business Cycles effect not only production
output, but also employment, investments,
consumptions, interest abd price level.
4. Business Cycles effect particularly essential
goods like Sale of Cars, Television, AC so on.
5. During Business Cycles, Non-Durable goods
are less effected. (Maintain great stability)

9. Features of Business Cycle
6 During Business Cycle, the impact of
depression or expansion is direct on inventories
of goods,
7. During Business Cycles, Profits may go high
or even negative and business go bankrupt.,
8. Business Cycle has international effect, if it
starts in one country, it effects other countries
too due to trade links.
9. Business Cycles start with one

10. Causes of Business Cycle
● Under consumption or over consumption,
● Innovation carried out Industrial and
Commercial establishments,
● Natural Disasters like flood, earth quake,
sunami and so on,
● Excess investments and savings,
● Money Stock Supply

11. Economic Indicators
Economic Indicators are various economic data
released by the Government from time to time
and investors and entreprenuers gather these
information to analyse and interpret, to assess
the overall health of the economy for their
current and/ or future investments.
Investors derive conclusion from specific data
released by the government from time to time.
These include:

12. Economic Indicators
Economic Indicators released by the
Government:
● Consumer Price Index (CPI),
● Gross Domestic Product (GDP),
● Unemployment figures,
● Crude Oil Prices

13. Three Types of Economic Indicators
The 3 Types of Economic Indicators include:
● Leading indicators: The stock exchange
indicator of various firms,
● Coincident Indicators: Employment/ income
and retail sales and so on,
● Lagging Indicators: GNP, (Gross National
Product), Interest rates, are associated
economic..

14. Inflation
Inflation in general, means increase of prices of
essential products.
Inflation: Inflation is the persistent rise in the
general price level rather than a once for all rise in
it.
Deflation: Deflation represents persistently falling
prices.
'A single commodity price increase or decrease
cannot be said as Inflation'.
Presently, Underdeveloped, Developing and
Developed Economies suffer from inflation.

15. Inflation
Inflation in general, means increase of prices of
essential products.
Inflation: Inflation is the persistent rise in the
general price level rather than a once for all rise in
it.
Deflation: Deflation represents persistently falling
prices.
'A single commodity price increase or decrease
cannot be said as Inflation'.
Presently, Underdeveloped, Developing and
Developed Economies suffer from inflation.

16. 4 Cause of Inflation
1. Demand-Pull Inflation, (Demand exceeds supply,
due to excess money in the economy)
2. Excessive growth in money supply, (Autonomous
increase in investments, or consumptions or
expenditures)

17. 4 Cause of Inflation
3. Cost-Push Inflation, (Price increases due to
increase in factor costs like Wage Push inflation, Profit
Push inflation, Increase in raw material, crude oil
prices and so on)
4. Structural Inflation: (or Structuralist Inflation) Does
not applicable in underdeveloped countries like Latin
America and India, due to excessive fragmanted
(seperate from the group) due to market
imperfection and structural rigidies of various types.
Hence for such countries it doesnt effect or demand-
supply is inapplicable to them)

18. Measures to control inflation
Inflation is caused by the failure of aggregate
supply to equal the increase in aggregate
demand. Inflation can be controlled by
increasing supply and reducing money
incomes in order to control aggregate demand.
(3 Measures – Monetary, Fiscal and Other
Measures)

19. Measures to control inflation
Three Methods to control inflation:
● Monetary Measures: (RBI's Credit Policy,
Issue of fresh currency)
● Fiscal Measures: (Reduction on investments,
Increase Tax Rates, Motivate Savings, Deficit
Budget instead of Surplus Budget,)
● Other Measures: (Increase Production, Control
Price, Rationing (Civil Supplies Dept), Rational
Wage Policy)

20. PRICE INDEX
● Price Index is the Index Number expressing the
level of a group of commodities price relative to
the level of the prices of the same commodities
during a arbitrarily (rule not based on any
principle) chosen base period and used to
indicate changes in the level of prices from one
period to another.

21. Price Index
● Price index measure of relative price changes,
consisting of a series of numbers arranged so
that a comparision between the values for any
two period or places will show the average
differences in prices between places.

22. Kinds of Price Indices
Three Price Indices that are:
1. Primary Section,
2. Secondary Sector,
3. Tertiary Sector.
● Primary Sector: - Products or Output from
Earth which include, Agriculture, Mining,
Forestry, Fishing, etc.
Primary sector contributes to GDP 18% – 60%
to 70% of population is dependent for
employment.

23. Kinds of price indices
● Secondary Sector: Output from Industry and
Construction
Secondary sector contributes to GDP – 27.6%
and 17% of population depend for employment.
● Tertiary sector: Output from Services – India is
15th
largest service provider.
Tertiary Sector, contributes to GDP is more than
50% and 23% of population depend for
employment.

24. SWOT ANALYSIS
(India Economy)
● Strength of Indian Economy:
● Agriculture, (Self sufficient in food)
● One of the Heighest English speaking country,
● Extensive Higher Education,
● Diversified Economy,
●
3rd
Largest Reservoir of Engineers,
● Skilled Manpower,
● Signs of high Growth rate, (5% to 7%)
● Fast Growth of Information Technology.

25. SWOT ANALYSIS
Weakness of Indian Economy:
● Population growth need to be further reduced,
● Most dependent on agriculture,
● Literacy is a matter of concern,
● Inequalilities of Income and Wealth,
● Poverty,
● Urban-Rural Divided.

26. SWOT ANALYSIS
Opportunity in Indian Economy:
● Huge Retail Market potential,
● Area of infrastructure,
● Foreign Direct Investments (Govt is
encouraging and liberalizing on FDI),
● Indians employed in foreign countries.
(Availability of manpower)

27. SWOT ANALYSIS
Threats in Indian Economy:
● Global recession's effect on our economy,
● Fiscal deficit,
● Population has shown improvement but still a
threat,
● Growing Inflation,
● Agriculture-Monsoon dependent,
● Crude Imports.