The Business Cycle

Dr. Sayeeda Amber Hassan

Dr. Sarwat Jabeen
Dr. Sobia Siddique
Gohar Siddique
 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.
 Figure 8.1 A business cycle

Copyright © 2005
Pearson Addison-Wesley.
All rights reserved. 8-4
 Potential output
The business cycle
3 4

3 Actual
4 2 output
National output

2 1

1
O Time

 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.
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.
Figure 8.11 Industrial production indexes
in six major countries

8-22
 Real Business
Cycle Theory

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.
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
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