theoriesoftradecycle-130103112959-phpapp01.pptx

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1. Business Cycle

2. The  business cycle  or  economic cycle  refers to the fluctuations of economic activity about its long term growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). These fluctuations are often measured using the real gross domestic  product Perodic up’s and down’s movement in economic activity DEFINITION

3. BUSINESS CYCLE CURVE

4. B oom : - Results from too much spending. - Economy experiences rapid inflation - Factors of production become expensive Recession : - Results from too little spending. - GDP is falling - Demand in the economy will fall leading to closure of firms and unemployment STAGES OF BUSINESS CYCLE

5. Slump : - High level of unemployment. - Business will rapidly close down creating serious consequences for the economy Growth/Recovery : - G DP is rising - Unemployment is falling - Business are experiencing rising profits - ‘Feel good’ factor among the people as their incomes are rising

6. PERIODICITY:  Occurs in 6 to 12 years  The gap between two cycles is not certain SYNCHRONIZATION: Interdependence of sectors leads to slowdown in one sector affects the other sector SELF ENFORCING: Most critical features of business cycle Cyclical movements in one sector spreads to other sector FEATURES OF BUSINESS CYCLE

7. The Short Kitchin Cycle :  It is also known as the minor cycle, which is of approximately 40 months duration  on the basis of on the basis of his research that a major cycle is composed of two or three minor cycles of 40 months research that a major cycle is composed of two or three minor cycles in 1923 The Long Jugler Cycle :  This cycle is also known as the major cycle. It is defined “as the fluctuation of business activity between successive crises.”  This cycle is also known as the major cycle. It is defined “as the fluctuation of business activity between successive crises.” TYPES OF BUSINESS CYCLE

8. The Very Long Kondratieff Cycle :  In 1925, N.D. Kondratieff, the Russian economist, came to the conclusion that there are longer waves of cycles of more than 50 years duration, made of six Jugler cycles  A very long cycle has come to be known as the Kondratieff wave Kuznets Cycle :  This cycle occurs in the intervel of 7 to 11 years

9. Post-World War II Recessions

10. Another Look at Expansions and Recessions

11. Our focus is to compare India's business cycle in the pre 1991 economy, with the post 1991 Indian economy, after the large scale liberalization reforms of 1991 C hanging nature of the Indian business cycle from 1950 - 2010

12. COMPARISON OF INDIAN BUSINESS CYCLE BETWEEN POST REFORM AND PRE-REFORM

13. It is a cyclic process It refers to ups and downs in the level of economic activity It is a period during which trade expands then slow down and then expands again Time gap between two trough ( or peaks) will vary between 6 to 12 years Introduction of trade cycle

14. Marginal Propensity to consume ( MPC ) : It is the measure of change in total income on the keenness of people to spend on consumer goods MPC = = Marginal propensity to save ( MPC ) It is measure of change in total income on keenness of people to save MPS = =   TERMS TO REMEMBER

15. Multiplier : A multiplier measures the effect of certain amount of capital investment on total employment or total income or total consumption k = Example : If MPC (consume) = 2/3 ; MPS ( save) = 1/3 ; Multiplier = 3 If MPC (consume) = 1/3 ; MPS ( save) = 2/3 ; Multiplier = 1.5 If investment increases in a business, its growth will be high   TERMS TO REMEMBER

16. Accelerator : C hanges in demand for consumer goods bring about wider changes in the production of appropriate capital goods TERMS TO REMEMBER

17. Climatic or Sunspot theory Keynes’ theory Hick’s Theory Hawtrey’s monetary theory Innovation theory Over-investment theory Over-production theory Theories of trade cycle/business cycle

18. Trade cycles are caused by sun spots. Sunspots appear on the face of the sun. Almost at regular intervals of 10.4 years Sunspot theory

19. SPOT APPEARS SUN EMITS LESS HEAT CROP YIELD WILL BE LOW INCOME OF FARMER FALLS LESS PURCHASING POWER

20. Based on only agro based theory Good or bad crop can only be one factor of depression or expansion but they cannot account for all the features The trade cycle occur at regular intervals of 10.4 years, while length of the trade cycle is 7 to 8 years Drawback

21. Deals with fluctuations in income, employment and money concept of Marginal Efficiency of Capital(MEC) Example : buying of a machinery- how much return will we get in the coming years Keynes’ theory MEC:- where price of capital=yield from capital

22. Rate of investment depends upon Rate of interest Marginal efficiency of capital Entrepreneurial expectations P essimistic O ptimistic FACTORS

23. Rate of investment Prospective yield Marginal efficiency of capital Rate of interest Entrepreneurial expectations Supply price of capital goods

24. Govt expenditure helps the economy to recover Growth path cannot continue indefinitely. Excess inventory of capital goods brings pessimistic feelings in entrepreneurs who fear recession, which discourages further investment Example : $100 million dam Project; 10,000 people employed (increases demand for consumer goods) 30,000 people in different sectors gets benefit whose combined income is say 250 million Vice versa also happens Keynes’ theory

25. Occurs due to interaction of multiplier and accelerator Super multiplier Upswing is the outcome of multiplier and accelerator downswing is the outcome of multiplier alone, since accelerator remains inactive Upper turning point is affected by elements like population, technology, capital stock At lower turning point there is increase in net investment, turning cycle upwards Hick’s Theory

26. Warranted rate of growth : is the one that will sustain itself in congruity with equilibrium of saving and investment Autonomous investment : Direct response to invention Long range investment Induced investment : Level of income Multiplier and Accelerator : Time Lag Consumption of current year is a function of income of last year ( ex: buying a car) . With a lag of 1 year Investment is function of output of same year Hick’s Theory

27. This trade cycle is a purely monetary phenomenon It is changes in the flow of monetary demand on the part of businessmen that lead to prosperity and depression in the economy He opines that non-monetary factors like strikes, floods, earthquakes, droughts, wars, etc. may at best cause a partial depression, but not a general depression. HAWTREY’S MONETARY THEORY

28. GROWTH PHASE The expanded phase of the trade cycle starts when banks increase credit facilities.  They are provided by the reducing the lending rate of interest and by purchasing securities  These encourage borrowings on the part of merchants and producers. This is because they are very sensitive to changes in the rate of interest. So when credit becomes cheap, they borrow from banks in order to increase their stocks or inventories .  For this, they place larger orders with producer who, in turn, employs more factors of production to meet the increasing demand. Consequently, money incomes of the owners of factors of production increase thereby increasing expenditure on goods . The merchants find their stocks being exhausted. HAWTREY’S MONETARY THEORY

29. BOOM PHASE They place more orders with producers. This leads further increase in productive activity, in income, outlay, demand and a further depletion of stocks of merchants According to Hawtrey , “Increased activity means increased demand, and increased demand means increased activity. A vicious circle is set up, a cumulative expansion of productive activity .” As the cumulative process of expansion continues, producers quote higher and higher prices. Higher prices induce traders to borrow more in order to hold still larger stocks goods so as to earn more profits . Thus optimism encourages borrowing, borrowing increases sales, and sales raise optimism. HAWTREY’S MONETARY THEORY

30. RECESSION PHASE According to Hawtrey , prosperity cannot continue limitlessly. It comes to an end when banks stop credit expansion . Banks refuse to lend further because their cash funds are depleted and the money in circulation is absorbed in the form of cash holdings by consumers . Another factor is the export of gold to other countries when imports exceed exports as a result of high prices of domestic goods . These factors force the banks to raise interest rates and refuse to lend . Rather, they ask the business community to repay their loans. This starts the recessionary phase . In order to repay bank loans, businessmen start selling their stocks. This sets the process of falling prices. They also cancel orders with producers. HAWTREY’S MONETARY THEORY

31. SLUMP PHASE This , in turn, leads to reduction in the demand for factors of production. There is unemployment. Incomes fall . Falling demand, prices and incomes are the signals for depression. Unable to repay bank loans, some firms go into liquidation thus forcing banks to contract credit further. Thus the entire process becomes cumulative and the economy is forced in to depression . According to Hawtrey , the process of recovery is very slow and halting. As depression continues, traders repay bank loans by selling their stocks at whatever prices they can . As a result, money flows into the reserves of banks and funds increase with banks HAWTREY’S MONETARY THEORY

32. Trade cycle is not purely monetary phenomenon It is world wide phenomenon Disadvantage

33. Business cycle are driven entirely by technology shocks rather than by monetary or changes in expectations If there is an invention, productivity will increase and business people invest more on that. It leads to boom If there is lack of invention, the productivity will decrease Real business cycle

34. Innovation can be of various types 1-new product 2-new market 3-niche market 4-new technology 5-new source of raw material Innovation theory

35. Innovation leads to more production Ultimately increase in aggregate demand Further increase in income of business Innovation theory

36. The full employment assumption is unrealistic. Bank is not the only source of finance for every innovation in business. Many times the profits are ploughed back to finance innovations. Innovation cannot be the sole cause of business cycle. Drawback of innovation theory

37. If economic system is capitalism,all the entrepreneurs wants to produce goods which are profit making Leads to high competition because of entry of new firms Profit making possibility : high Due to over production activity, initially everything increases Over prod. theory

38. Thereafter as a result firms starts withdrawing resulting in Less demand Less income Less production Less labour Cont’d

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