Dr. Sayeeda Amber HassanDr. Sarwat JabeenDr. Sobia Siddique

Gohar Siddique

The Business Cycle

The Business Cycle

The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time.

The Business Cycle The natural fluctuation of the economy

between periods of expansion (growth) and recession (contraction) .

Factors such as gross domestic product (GDP), interest rates, levels of employment and consumer spending can help to

determine the current stage of the economic cycle.

Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 8-4

Figure 8.1 A business cycle

O

Nat

iona

l out

put

Time

Potential output

1

2

34

Actualoutput

The business cycleThe business cycle

At one time, business cycles were thought to be extremely regular, with predictable durations, but today they are widely believed to be irregular, varying in frequency, magnitude and duration.

1

2

3 4

Business Cycle Indicators

Composite of leading, lagging and coincident indexes and used to forecast changes in the direction of the overall economy of a country.

They can be used to confirm or predict the peaks and troughs of the business cycle.

Leading Indicators

o A leading indicator is one that changes before the economy does.

o generally use to predict a new phase of the business cycle.

o Example:Bond yields, the index of consumer expectations, building permits, money supply

Lagging Indicators

is one that changes after the economy has changed.

Examples: 1.Profit earned by a business;2.The average duration of unemployment;3.The value of outstanding commercial and

industrial loans;4.The change in the Consumer Price Index for

services;5.The change in labor cost per unit of output.

Coincident Indicators

o that changes concurrently with the economy.

Еxamples: Nonagricultural employment; Manufacturing and trade sales; Personal income and industrial

production.

GOHAR SIDDIQUI

Phases of the Business Cycle

Trough The stage of the economy's

business cycle that marks the end of a period of declining business activity and the transition to expansion.

The business cycle is said to go through recovery (expansion), then the peak, followed by recession (contraction), and then it finally bottoms out with the trough.

Characteristics of the Trough

Economic/ business activities are minimum Production is minimum Demand for FOP (labor and capital) is low Investments are minimum Unemployment is high GDP growth is low

.

Recovery (Expansion)

The phase of the business cycle when the economy moves from a trough to a peak. It is a period when business activity surges and gross domestic product expands

until it reaches a peak. 

Also known as an "expansion".

Characteristics of Recovery (expansion)

Economic/ business activities start to rise Production starts increasing Demand for FOP increases Investments start increasing Unemployment decreases GDP growth is rising Standard of living is improving Prices increase as more consumption of

goods and services increase aggregate demand Demand Pull Inflation

.

DR.SERWAT JABEEN

Peak The highest point between the end of an

economic expansion and the start of a contraction in a business cycle. 

Key economic indicators, such as employment and new housing starts, begin to fall. It is at this point that real GDP

spending in an economy is its highest level.

Characteristics of the Peak

Businesses produce more goods Businesses invest in more machinery Consumers spend more money. Less money is spent by the Government on unemployment benefits More money is collected by the Government in income tax.o Prices tend to increase due to extra

demand

.

Recession (Contraction)

A phase of the business cycle in which the economy as a whole is in decline

More specifically, contraction occurs after the business cycle peaks, but before it becomes a trough.

Characteristics of Recession

Businesses cut back on production Demand for FOP decrease Investments are decreased Some businesses may go bankrupt Consumers spend less money Unemployment increases More money is spent by the Govt on

unemployment benefits Less money is collected by the Govt in

income tax and VAT Prices start to fall.

Since the World War II, most business cycles have lasted three to five years from peak to peak. The average duration of an expansion is 44.8 months and the average duration of a recession is 11 months.

As a comparison, the Great Depression - which saw a decline in economic activity from 1929 to 1933 - lasted 43 months.

8-22

Figure 8.11 Industrial production indexes in six major countries

Real business cycle theory assumes that our economy experiences fluctuations in technology, which determine our ability to turn inputs (capital and labor) into output (goods and services), and that these fluctuations in technology cause fluctuations in output and employment.

Real Business Cycle Theory

DR. SAYEEDA AMBER HASSAN

Summary and Conclusion

Business cycles are not regular and are not all alike.

Cycles have different lengths and turning points are hard to predict.

All variables do not behave exactly the same over each cycle.

A CASE STUDY

The Davis Service Group provides textile maintenance, hotel laundry and washroom services in the UK and Europe. Just like any other business, it is affected by the changes in the business cycle - from boom to recession and back again. Throughout the business cycle it has to respond to the economic challenges it faces.

For example, people have cut back on holidays, so the need for hotel linen services has reduced. Davis has however, enjoyed rapid growth in emerging markets, such as the Czech Republic, which are at different stages of the business cycle.

By balancing resources to meet customers' needs, Davis Service Group has been able to invest in the business where necessary to be ready for recovery.

CASE STUDY cont--

Like hotels, the magazine publishing industry was expecting a decline in subscribers during recent difficult economic times because this is a 'nice to have' item rather than a necessity.

However, in the second half of last year, Private Eye saw its highest circulation figures for almost two decades, despite the recession. Private Eye is a satirical magazine. Its editor, Ian Hislop, is a team captain on the current affairs quiz “Have I Got News for You”.

In fact, it seems that the magazine industry has fared quite well overall. Men's Health, Reveal and Heat magazines all saw increases in circulation. The popularity of these magazines may well be attributed to the fact that they are a fairly inexpensive way of entertaining us. The challenge for the magazine industry, like Davis, is to provide what customers want.

(Times Online 11th February 2010)

Questions

 Draw and label the business cycle.  Using the case study, explain the

characteristics of the different stages of the business cycle. 

Give examples of businesses that might be able to benefit from the recession 

Analyze the strategies that organizations, like the Davis Service Group, can adopt during times of recession.

Using the case study, explain the characteristics of the different stages of the business cycle. 

Recession – low demand for goods and services, unemployment increases, investment in new plant and equipment falls, businesses close down

Recovery – individuals and firms have more money to spend so demand starts to increase, businesses may still be cautious about taking on new staff or increasing investments

Boom – confidence rises, sales of goods and services are high, unemployment falls so business may find it difficult to recruit, inflation may increase i.e. prices rise rapidly 

Give examples of businesses that might be able to benefit from the recession

Examples may include:  Shoe repairers - people repair rather

than buy new ones, DIY stores – home improvement is a

cheaper alternative to buying a new home,

Pound stores – people cut back on spending 

Analyze the strategies that organizations, like the Davis Service Group, can adopt during times of recession

Strategies may include: Cutting unnecessary costs e.g. Finding cheaper suppliers Introducing flexible working hours Enter markets in other countries that are not

experiencing recession Stimulate demand by cutting prices or introducing

special offers Reduce excess capacity by selling assets or reducing

overtime Delay investment plans

THANKYOU FOR YOUR PATIENT LISTENING