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Managerial Economics - Business Cycle

Phases Of A Business Cycle

   Posted On :  29.05.2018 11:32 pm

The business cycle has four phases, Boom, Recession, Slump and Recovery.

Phases Of A Business Cycle:
 
The business cycle has four phases, Boom, Recession, Slump and Recovery. In economics it has been observed that income and employment tend to fluctuate regularly overtime. These fluctuations are known as business cycle or trade cycle.
 
Peak / Boom: when the economy is booming national income of the country is high and there is full employment, the consumption and investment is high. Tax revenue is high. Wages and profits will also increase. There will be inflationary pressure in the economy.
 
Recession: when the economy moves into recession, output and income fall leading to a reduction in consumption and investment. Tax revenue begins to fall and government expenditure begins to benefit the society. Wage demands moderate as unemployment rises, import and inflationary pressure declines.
 
Trough: economic activities of the country are low, mass unemployment exists, so consumption investment and imports will be low. Pricing may be falling (there will be deflation)
 
Recovery: as the economy moves into recovery, national income and output begin to increase. Unemployment falls, consumption, investment and import begins to rise. Workers demand more wages and inflationary pressure begins to mount.



The fluctuation in the activities is measured with respect to a horizontal line indicating a given steady level of economic activity. However, if the time series reveals a significant long term trend, the vertical deviations of the reported or actual points from the estimated trend line are measured and plotted separately to obtain a clear picture of the underlying business cycle. Most economic variables go through ups and downs over time and the economy as a whole experience periods of prosperity and periods of recession. The measure of prosperity is the amount of goods/services produced (GDP) during a year. Actual business cycle are measured by changes in real GDP, that is the market value of all the goods and services produced within a nation’s borders, with market values measured in constant prices (prices of a specific base year).

Expansion or boom: is the period in the business cycle from a trough up to a peak, during which output and employment rise. Contractions, recession, or slump: is the period in the business cycle from a peak down to a trough, during which output and employment fall.

Recession: a decline in total output (real GDP) for 2 or more consecutive quarters. Reduction in investment, employment and production, reduction in income, expenditure, prices and profits reduction in bank loans. The business expansion stops that leads to depression.
 
Depression: the level of economic activity is extremely low. The income, production, employment, prices, profits of the country is very low. Organizations fix low price which leads to low profit, low wages, people suffer, closing down of business.
   
Recovery: slow increase in output, employment, income and price. Increase in demand, investment, bank loan, advances. This leads to recovery, revival of prosperity.


Tags : Managerial Economics - Business Cycle
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