Fluctuations in Real GDP ( The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports) referred to as Business Cycles. The duration and intensity of each phase of the Business Cycle are not always clear. Business Cycles are typical of Market, Capitalistic economies due to the free nature of those economic systems. Business Cycles

What is a business cycle? A business cycle refers to periods of expansion and contraction. A peak is the high point following a period of economic expansion. A trough is the low point following a period of economic decline.

Definition Acc to Professor Haberler “ The Business Cycle in the general sense may be defined as an alternation of periods of prosperity and depression of good and bad trade.

Types of Cycles: 1.The Short Kitchen Cycle: Joseph Kitchin British Economist - Also Known as Minor Cycle Month duration - Dis b/w Major and Minor Cycle Major Cycle-composed of 2 or 3 Minor cycle. 2. The Long Jugler Cycle: Jugler-1862-French Economist - Also Known as Major Cycle - Fluctuation of business activity b/w successive crises - Duration- 9 ½ yrs

Types of Cycles: 3. The Very Long Kondratieff Cycle: N.D.Kondratieff-1952-Russian Economist - Very Long cycle – Kondratieff wave - Duration –More than 50 yrs 4. Building Cycle: Warren & Pearson -2 American Economist Relates to the building Construction - Duration- twice that of Major Cycle -18Yr 5. Kuznets Cycle: Prof. Simon Kuznets- American Economist - Propounded new cycle- Secular Swing-16-22yr - dwarfs -7 to 11 yrs – relatively insignificance

Phases Of a Business Cycle A typical Cycle is generally divided in to four Phases 1. Expansion Or Prosperity Or the Upswing Or Boom 2. Recession Or Upper-turning point. 3. Contraction or Depression or Downswing 4. Revival Or Recovery Or Lower Turning Point

% Change in Real GDP Contraction Expansion Recession Or Peak Recovery 0%

Inflection point Equilibrium Upswing phase Recession Phase Depression phase Revival aboveabove belowbelow

Expansions Or Boom Expansions are periods of increasing Real GDP. Unemployment decreases, businesses expand, and Personal Consumption increases. As expansions continue, there tend to be upward pressures on prices (inflation) and interest rates.

Peak Or Recession A peak is a period when the economy starts to level off. Businesses postpone new investments, and consumer saving tends to increase. Rising prices and interest rates tend to restrict purchases and investments, often leading to a Contraction.

Contraction Or Depression A Contraction is a period of declining Real GDP. Consumer spending decreases, and unemployment increases as businesses layoff workers and shorten work hours. Interest rates and prices level off, and often decline during long contractions.

Long Term Contractions Recession: Six months of declining Real GDP Depression: Twelve months of declining Real GDP coupled with at least 15% unemployment.

Trough Or Recovery Or Lower Turning Point A Trough is the bottom of a Contraction. Lower interest rates and prices bring customers back to markets.

Things That Affect the Business Cycle Business Investment: High levels of business investment (capital good increases like machinery and equipment) promote expansion. Low levels of business investment contribute to contraction. Money and credit: When interest rates go up, people borrow less, and this less money is circulating in the economy, thus contributing to a contraction.

Things That Affect the Business Cycle Public Expectations: People will increase their spending if they believe the economy is strong. This helps promote expansion. External Factors: Like energy crisis and war.

Theories Of Trade Cycle 1. Sun-Spot Theory Or Climatic Theory: Jevons & Moore -based on climatic variation - Climatic variation are due to spots of sun so it is called sun-spot theory. 2. Psychological Theory: A.C.Pigou, Beveridge & others - Psychological feelings

Theories Of Trade Cycle 3. Hawtrey’s Theory Or Monetary Theory: - Trade cycle is purely a Monetary Phenomenon” & Natural Causes like climatic condition, earthquake etc., -Changes in flow of money - Inflation & Deflation created by ROI 4. Von Hayek’s Theory Or Over-Investment Theory: Prof Von Hayek. - basis of Monetary Over-investment and consequent over-production

Theories Of Trade Cycle 5. Over Saving Or Under Consumption Theory: - Trade cycle is purely a Monetary Phenomenon” & Natural Causes like climatic condition, earthquake etc., -Changes in flow of money - Inflation & Deflation created by ROI 4. Von Hayek’s Theory Or. Psychological Theory: A.C.Pigou, Beveridge & others - Psychological feelings