Business Government & International Economics

Assignment: 3
Date: 8-04-2019
Submitted by:
Waleed Bin Aamir S2019270006
M. Saad Zafar S2019270004
M. Danish Sajjad S2019270001
Afraz Jehan S2019270009
Describe the Phase of Business Cycle and Explain?

The term Business Cycle explains the fluctuation in output of the economy. Basically, it
describes the change in trade, production and other general activities related to economy. It
focuses on the variation of the movement of levels of GDP and the duration growth and
reduction in levels of economic activities. Following are the phases of the Business Cycle:

Expansion Phase:

This phase of business Cycle can be described by the increase of employment, economic growth
and prices of products and services. In this phase, there is also an increase in several economic
factors like: wages, profit, output, demand & supply of products etc.

In this stage of business cycle, the financial situation of a debtor is quite stable so they are able to
pay back their debt. Due to this reason, the creditor lends money to the debtor at higher interest
rate. In this stage, the production level will be at maximum capacity and the unemployment rate
will be zero. The prices and cost will be increased at a faster rate. In other words, there is more
production, more employment opportunities, more demand of products and services and more
investment opportunities as well. So we can say that this is the highest point of all phases of
business cycle. At this phase, output of economy continuously increases. There are some
indicators of expansion phase in business cycle which are:

Output increases, upward trend increases, Aggregate Demand increases, prices level increases
and private or foreign investment also increases.

Recession Phase:

In this stage of business cycle, all the economic factors e.g. production, prices, and investments
begin to decrease. In this phase, many industry producers are not much aware of decrease in the
demand of products due to which they continue to produce goods and services. As a result, the
supply of products becomes much greater than the demand of products in the market.
In simple words, we can say that, over production occurs. Due to more supply, cost of production
becomes higher than the profit which is being gained by it. This type of situation is only
considered as a small variation in the market first but when it appears to be a big issue, it gets
producers begin to notice it. Due to this, they avoid to do any type of investment in factors of
production.

Furthermore, the economic indicators such as wages, income and output show a decreased rate.
GDP begins to slowdown and Aggregate demand also began to fall. In this phase, level of
buying, employment and production typically reduce. Following are the indicators of this phase:
Supply>Demand, Unsold stock increase, employment level decrease.

Depression:

Depression is the third phase of a business cycle followed by Recession. In simple terms if a
country is unable to control and fix the period of recession, the economy will reach depression. A
depression is an unusual and extreme form of recession in which long-term downturn in
economic activity occurs which usually lasts for many years.

Indicators of Economic Depression include:

 A substantial fall in GDP:

One of the indicators of depression is when the GDP declines more than 10% from the most
recent economic peak. A 10% fall in GDP would mean that the country value of goods and
services produced in that particular year fell by 10% which has a severe negative impact on the
economy as a whole.

 Very low Output:

It means that the total quantity of goods and services produced in the country will be very low
which would cause and extreme output gap which is the gap between the actual output and the
potential output of an economy.

 Very low Demand:

The demand for goods and services would also fall dramatically. As the overall economy is
suffering the incomes or earnings of masses would also decrease which would result in a lack of
buyers and overall spending by individuals would fall.

 Very low Investment:

Firms invest to meet future demand. If demand is falling, then firms will cut back on investment.
Both the private and foreign investment would fall as the investors won’t get the desired return
on their investments which again will hurt the economy.

 Extreme employment:

Due to a high decrease in overall business activity there would be less opportunities available for
jobs as a result extreme unemployment would occur. Similarly, as the demand of goods and
services fall during the depression phase in an economy and the businesses in order to prevent
losses might cut down on their costs by firing employees to save salaries which would further
increase unemployment rates.

Recovery:

An economic recovery is a stream of improved business activity which marks the end of
Economic Depression. Recovery is a time when the economy starts to recover and there is an
improvement in the business cycle. More jobs are created and more goods and services are
supplied by businesses. Unemployment begins to fall and gradually consumer spending starts to
increase.

Indicators of Economic Recovery include:

 GDP growth rate starts to improve:

One of the indicators of recovery is that the GDP starts to gradually improve. It could be due to
government intervention by providing financial aid to businesses during the depression phase or
through stimulating demand by reducing taxes.
  A rise in Demand:

Due to a fall in demand during the depression phase prices also decreased. It finally reached the
point that the masses can start affording goods and services which see a gradual rise in demand
and consumer spending which is a sign of recovery.

 A rise in Investment:

As the demand would see an uplift both the private and foreign investors would gradually start
investing to meet the future demands. During recovery government also starts spending in both
the private and public sectors so more demand is generated which can help regain the economic
activities.

 A rise in employment rates:

As the economic and business activity is generated jobs are created and the employment rate is
gradually increased as companies begin to hire again. Similarly, during the recovery phase as the
GDP growth will improve which has an inverse relation with unemployment the employment
opportunities would rise.