BUSINESS

CYCLE
THEORY
 Group 4

Alit Wahyuningsih
1607531041

Putu Ayu Fitriani

1607531043

I Gede Agung Sukamara

1607531118
 Introduction

Many free enterprise capitalist countries such as USA and Great

Britain have registered rapid economic growth during the last
two centuries. But economic growth in these countries has not
followed steady and smooth upward trend. There has been a long-
run upward trend in Gross National Product (GNP), but
periodically there have been large short-run fluctuations in
economic activity, that is, changes in output, income,
employment and prices around this long- term trend.
 Main Topic
1. The
Meaning of
4. The Business
Management Cycle
of Business
Cycle
2. The
Phases of
5. The Business
Example Of Cycle
Study Case
About
3. The
Business
Theories of
Cycle
Business
Cycle
 1. The 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 periods of bad trade
characterised by falling prices and high unemployment
percentages.”
 “
The duration of a business cycle has not been
of the same length; it has varied from a
minimum of two years to a maximum of ten to
twelve years, though in the past it was often
assumed that fluctuations of output and other
economic indicators around the trend showed
repetitive and regular pattern of alternating
periods of expansion and contraction.
 2. The Phases
of Business
Cycle
Business cycles have shown distinct phases the study of
which is useful to understand their underlying causes. These
phases nave been called by different names by different
economists.
 The Phases of
Business Cycle
1. Expansion 2. Peak
upper
Boom,
turning
Upswing or
point
Prosperity

4. Trough 3. Contraction
lower Downswing,
turning Recession or
point Depression
 Expansion and Prosperity

In its expansion phase, both output and employment increase till we have full
employment of resources and production is at the highest possible level with the
given productive resources. There is no involuntary unemployment and whatever
unemployment prevails is only of frictional and structural types. Thus, when
expansion gathers momentum and we have prosperity, the gap between potential
GNP and actual GNP is zero, that is, the level of production is at the maximum
production level. A good amount of net investment is occurring and demand for
durable consumer goods is also high. Prices also generally rise during the
expansion phase but due to high level of economic activity people enjoy a high
standard of living.
 Contraction and Depression

As stated above, expansion or prosperity is followed by

contraction or depression. During contraction, not only there
is a fall in GNP but also level of employment is reduced. As
a result, involuntary unemployment appears on a large
scale. Investment also decreases causing further fall in
consumption of goods and services. At times of contraction
or depression prices also generally fall due to fall in
aggregate demand. A significant feature of depression
phase is the fall in rate of interest. With lower rate of interest
people’s demand for money holdings increases.
 Trough and Revival

There is a limit to which level of economic activity can fall.

The lowest level of economic activity, generally called
trough, lasts for some time. Capital stock is allowed to
depreciate without replacement. The progress in technology
makes the existing capital stock obsolete. If the banking
system starts expanding credit or there is a spurt in
investment activity due to the emergence of scarcity of
capital as a result of non-replacement of depreciated capital
and also because of new technology coming into existence
requiring new types of marines and other capital goods. The
stimulation of investment brings about the revival or recovery
of the economy.
 3. Theories of
Business
Cycles
What causes business cycles? Several theories of business
cycles have been propounded from time to time. Each of
these theories spells out the factors which cause business
cycles.
Theories of Business Cycles

Sun-Spot
Theory

Wicksell’s Hawtrey’s
Over- Monetary
investment Theory

Over- Under-
Investment Consumption
Theory Theory
 4. The
Management of
Business Cycle
When the economy is not at a steady state and instead is at a point
of either overheating (growing to fast) or slowing, the government
and monetary authorities have policy mechanisms, fiscal and
monetary, respectively, at their disposal to help move the economy
back to a steady state growth trajectory.
 The Management of Business Cycle

The goal of economic policy is to keep the economy growing

at a sustainable rate. It should be strong enough to create
jobs for everyone who wants one but slow enough to avoid
inflation. Three factors cause each phase of the business
cycle. Those are the forces of supply and demand, the
availability of capital and consumer confidence. The most
critical is confidence in the future. The economy grows when
there is faith in the future and in policymakers. It does the
opposite when confidence drops. See how this worked in
each business cycles since 1929.
 4. The
Management of
Business Cycle
When the economy is not at a steady state and instead is at a point
of either overheating (growing to fast) or slowing, the government
and monetary authorities have policy mechanisms, fiscal and
monetary, respectively, at their disposal to help move the economy
back to a steady state growth trajectory.
 Expansionary Policy

Expansionary fiscal policy involves government

spending exceeding tax revenue, and is usually
undertaken during recessions. Fiscal authorities will
increase government spending in order to revive the
economy. Expansionary monetary policy relies on the
central bank increasing availability ofloanable funds
through three mechanisms: open market operations,
discount rate, and the reserve ratio. As the supply of
loanable funds increases, the interest rate is expected
to decrease and thereby increase the desire to borrow
funds for consumption and investment purposes.
 Contractionary Policy

Contractionary fiscal policy is opposite of the action

taken in an expansionary purpose, and occurs when
government spending is lower than tax revenue.
Similarly, contractionary monetary policy is the
opposite of expansionary monetary policy and occurs
when the supply of loanable funds is limited, to reduce
the access and availability to relatively inexpensive
credit.
 5 . The Example of
Study Case about
Business Cycle
The 2008 recession was so nasty because the economy immediately
contracted 2.7 percent in the first quarter of 2008. When it
rebounded 2 percent in the second quarter, everyone thought the
downturn was over.
 The Example of Study Case about
Business Cycle

The expansion phase started in the third quarter of 2009

when GDP rose 1.3 percent. That was thanks to the
stimulus spending from the American Recovery and
Reinvestment Act. The unemployment rate continued to
worsen, reaching 10.0 percent in October. Four years
into the expansion phase, the unemployment rate was
still above 7 percent. That is because the contraction
phase was so harsh. The peak that preceded the 2008
recessions occurred in the third quarter 2007. GDP
growth was 2.7 percent. For other examples, see History
of Recessions.
Any Question?