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The Business Cycle or The Economic CycleMarallag, EllainePaderanga, FranzelSan Diego, Jann KyleA 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.What is a business cycle?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.

According to Arthur F. Burns and Wesley C. Mitchell..

Theories of Business/Exonomic CycleKeynesian 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.

Thebusiness cycleis the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in Real GDPand other macroeconomic variables.

How we measure business cycle ?

Theories of Business/Economic CyclesExogenous Theories forces outside the economic system create the business cycle.Forces: wars, political developments, natural disasters, or major innovations. Endogenous Theories forces within the economic system cause the fluctuations in the economy. Forces : Accelerators , multipliers, innovations or monetary policies.

Theories of Business/Economic Cycles

Business/Economic Cycle

Business CycleThe Business CycleGrowthProsperity/Boom/PeakDepression/Trough/SlumpRecession/ContractionRecovery/ExpansionBusiness ActivitiesTimeDEPRESSIONPROSPERITYPROSPERITYExpansionRecessionPeakRecoveryTroughLine of cycleSteady growth lineExpansionPHASES OF BUSINESS CYCLE11The 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.Boom/Prosperity PEAKHighest level of prosperityThe phase of recession begins

13During 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 fallwhile bankruptcies and the unemployment rate rise.RecessionWhat causes recession?Decrease in spending by consumers due to lack of faith in the economyLess consumption would mean decline in demand for productsWhich leads the manufacturers to cut down on productionLower production would lead to job cuts Which leads to high levels of unemploymentWhich perpetuates the cycle due to limited spendingRECESSIONDownward slide in growth rate becomes rapid and steady Output, employment, prices etc. register a rapid decline When the growth rate goes below the steady growth rate depression sets in

16The 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/TroughDEPRESSION/TROUGHDepression begins whenGrowth is less than zeroTotal output, employment, prices, bank advances etc. Decline during subsequent periodDepression lasts as long as growth rate stays below the stagnated growth rate

18TROUGHPhase during which the downward trend in the economy slows down and eventually stopsEconomic activities once again register an upward movement Period of severe strain on the economyEconomy registers a continuous and rapid upward trend in output,employment, etc.It enters the phase of recovery

19The rising price of an assetIncreased 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.

RecoveryIncrease in OutputEmploymentInvestmentAggregate demandBank creditsWholesale & Retail pricesPer capita outputStandard of livingRECOVERY & EXPANSION21RECOVERY & EXPANSIONIn 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

22The Business CycleGrowthProsperity/Boom/PeakDepression/Trough/SlumpRecession/ContractionRecovery/ExpansionBusiness ActivitiesTimeEffects of Business CyclesDuring 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.

To encourage more foreign investments to accelerate our economic recovery.To transform the people into more self-reliant and productive groups.Government Policies

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.