MACRO ECONOMICS FINAL

PROJECT REPORT

MACRO-ECONOMICS
BUSINESS CYCLE
MEMBERS OF GROUP:
SYEDA ZAHRA MEHDI 1811291
HASEEB UR REHMAN 1811283
SHAHMEER QURESHI 1811280
MUHAMMAD DANISH 1811286

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BUSINESS CYCLE
INTRODUCTION:

The business cycle is the natural rise and fall of economic growth that occurs over time. The
cycle is a useful tool for analysing the economy. It can also help you make better financial
decisions. The business cycle, also known as the economic cycle or trade cycle, is the downward
and upward movement of gross domestic product (GDP) around its long-term growth trend.
All businesses and economies go through this cycle, though the length varies.The length of a
business cycle is the period of time containing a single boom and contraction in sequence. These
fluctuations typically involve shifts over time between periods of relatively rapid economic
growth (expansions or booms) and periods of relative stagnation or decline.
Business cycles are usually measured by considering the growth rate of real gross domestic
product.

WHAT IS BUSINESS CYCLE?

Business cycles are a type of fluctuation found in the aggregate economic activity of nation.A
cycle consists of expansions occurring at about the same time in many economic activities,
followed by similarly general recession , this sequence of changes is recurrent but not periodic.
In essence, business cycles are marked by the alternation of the phases of expansion and
contraction in aggregate economic activity, and the among economic variables in each phase of
the cycle. Aggregate economic activity is represented by not only real i.e inflation-adjusted
GDP , a measure of aggregate output but also the aggregate measures of industrial production,

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employment, income, and sales, which are the key coincident economic indicators used for the
official determination.
So it’s basically a cycle of fluctuations in the Gross Domestic Product (GDP) around its long-
term natural growth rate. It explains the expansion and contraction in economic activity that an
economy experiences over time.

The term “business cycle” refers to economy-wide fluctuations in production, trade, and general
economic activity. From a conceptual perspective, the business cycle is the upward and
downward movements of levels of GDP (gross domestic product) and refers to the period of
expansions and contractions in the level of economic activities (business fluctuations) around a
long-term growth trend.
There are some phases of business cycle .Business cycles are identified as having four distinct
phases: expansion, peak, contraction, and trough.

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A business cycle traverses the rise and fall of gross domestic product (GDP).
As the economy expands and contracts, we can see patterns emerge over time and those
fluctuations are measured in "business cycles".

THE MEANING OF BUSINESS CYCLE:

The Business cycle refers to the cyclical nature of economic growth. Typically the business
cycles involves a period of rapid growth followed by slower growth or in some cases a
recession.The business cycle is sometimes referred to as the ‘trade cycle’ or just economic cycle.
Some business cycles are more volatile and become known as a period of ‘boom and bust’. The
period of high income, output and employment has been called the period of expansion, upswing
or prosperity, and the period of low income, output and employment has been described as
contraction, recession, downswing or depression.
The economic history of the free market capitalist countries has shown that the period of
economic prosperity or expansion alternates with the period of contraction or recession.
In other words, business cycles refer to ups and downs in aggregate economic activity, measured
by fluctuations in various macroeconomic variables, such as Gross Domestic Product (GDP),
employment, and rate of consumption.
Generally, an economy experiences business cycles over a long period of time. Earlier, business
cycles were thought to be periodic with anticipated durations. However, in recent times, business
cycles are widely believed to be irregular features of an economy, varying in frequency, degree,
and time interval.
Business cycles, also called trade cycles or economic cycles, refer to perpetual features of the
economic environment of a country. In simple words, business cycles can be defined as
fluctuations in the economic activities of a country. The economic activities of a country include
total output, income level, prices of products and services, employment, and rate of consumption.
All these activities are interrelated; if one activity changes, rest of them would also show
changes.
These changes in the economic activities together produce a bigger change in the overall
economy of a nation. This overall change in an economy is termed as a business cycle. Business
cycles are generally regular and periodical in nature.

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PHASES OF BUSINESS CYCLE:

Business cycles are identified as having four distinct phases: expansion, peak, contraction, and
trough.
An expansion is characterised by increasing employment, economic growth, and upward
pressure on prices. A peak is the highest point of the business cycle, when the economy is
producing at maximum allowable output, employment is at or above full employment, and
inflationary pressures on prices are evident. Following a peak, the economy typically enters into
a correction which is characterised by a contraction where growth slows, employment declines
(unemployment increases), and pricing pressures subside. The slowing ceases at the trough and
at this point the economy has hit a bottom from which the next phase of expansion and
contraction will emerge.
EXPANSION:

The line of cycle that moves above the steady growth line represents the expansion phase of a
business cycle. In the expansion phase, there is an increase in various economic factors, such as
production, employment, output, wages, profits, demand and supply of products, and sales.
In addition, in the expansion phase, the prices of factor of production and output increases
simultaneously. In this phase, debtors are generally in good financial condition to repay their
debts; therefore, creditors lend money at higher interest rates. This leads to an increase in the
flow of money. In expansion phase, due to increase in investment opportunities, idle funds of
organisations or individuals are utilised for various investment purposes. Therefore, in such a

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case, the cash inflow and outflow of businesses are equal. This expansion continues till the
economic conditions are favourable.

PEAK:

The growth in the expansion phase eventually slows down and reaches to its peak. This phase is
known as peak phase. In other words, peak phase refers to the phase in which the increase in
growth rate of business cycle achieves its maximum limit. In peak phase, the economic factors,
such as production, profit, sales, and employment, are higher, but do not increase further. In peak
phase, there is a gradual decrease in the demand of various products due to increase in the prices
of input.
The increase in the prices of input leads to an increase in the prices of final products, while the
income of individuals remains constant. This also leads consumers to restructure their monthly
budget. As a result, the demand for products, such as jewellery, homes, automobiles,
refrigerators and other durables, starts falling.

RECESSION:

As discussed earlier, in peak phase, there is a gradual decrease in the demand of various products
due to increase in the prices of input. When the decline in the demand of products becomes rapid
and steady, the recession phase takes place.
In recession phase, all the economic factors, such as production, prices, saving and investment,
starts decreasing. Generally, producers are unaware of decrease in the demand of products and
they continue to produce goods and services. In such a case, the supply of products exceeds the
demand.
Over the time, producers realise the surplus of supply when the cost of manufacturing of a
product is more than profit generated. This condition firstly experienced by few industries and
slowly spread to all industries.
This situation is firstly considered as a small fluctuation in the market, but as the problem exists
for a longer duration, producers start noticing it. Consequently, producers avoid any type of
further investment in factor of production, such as labor, machinery, and furniture. This leads to
the reduction in the prices of factor, which results in the decline of demand of inputs as well as
output.

TROUGH :

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During the trough phase, the economic activities of a country decline below the normal level. In
this phase, the growth rate of an economy becomes negative. In addition, in trough phase, there
is a rapid decline in national income and expenditure.In this phase, it becomes difficult for
debtors to pay off their debts. As a result, the rate of interest decreases; therefore, banks do not
prefer to lend money. Consequently, banks face the situation of increase in their cash balances.
Apart from this, the level of economic output of a country becomes low and unemployment
becomes high. In addition, in trough phase, investors do not invest in stock markets. In trough
phase, many weak organisations leave industries or rather dissolve. At this point, an economy
reaches to the lowest level of shrinking.

RECOVERY:

As discussed above, in trough phase, an economy reaches to the lowest level of shrinking. This
lowest level is the limit to which an economy shrinks. Once the economy touches the lowest
level, it happens to be the end of negativism and beginning of positivism.
This leads to reversal of the process of business cycle. As a result, individuals and organisations
start developing a positive attitude toward the various economic factors, such as investment,
employment, and production. This process of reversal starts from the labor market.
Consequently, organisations discontinue laying off individuals and start hiring but in limited
number. At this stage, wages provided by organisations to individuals is less as compared to their
skills and abilities. This marks the beginning of the recovery phase.
In recovery phase, consumers increase their rate of consumption, as they assume that there would
be no further reduction in the prices of products. As a result, the demand for consumer products
increases.
In addition, in recovery phase, bankers start utilising their accumulated cash balances by
declining the lending rate and increasing investment in various securities and bonds. Similarly,
adopting a positive approach other private investor also start investing in the stock market as a
result, security prices increase and rate of interest decreases.
Price mechanism plays a very important role in the recovery phase of economy. As discussed
earlier, during recession the rate at which the price of factor of production falls is greater than the
rate of reduction in the prices of final products.
Therefore, producers are always able to earn a certain amount of profit, which increases at trough
stage. The increase in profit also continues in the recovery phase. Apart from this, in recovery
phase, some of the depreciated capital goods are replaced by producers and some are maintained
by them. As a result, investment and employment by organisations increases. As this process

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gains momentum an economy again enters into the phase of expansion. Thus, a business cycle
gets completed.

FEATURES OF BUSINESS CYCLE

1. Business cycles occur periodically. Although they do not show the same occurrence,
they do have some distinct categories such as stretching, height, loosening or
compression and compression. Over the course of the cycles the good varies from a
minimum of two years to ten to twelve years
2. Second, business cycles are synchronic. That is, they do not cause changes in any one
industry or sector but they are all inclusive characters. For example, depression or
infection occurs simultaneously in every industry or economic sector.
The recession passes from one industry to another and the chain reaction continues until the
entire economy has collapsed. The same process applies to the growth phase, prosperity is spread
through the various interactions of extracellular relationships or fostering relationships between
different industries, and sectors.
3. Thirdly, it has been recognized that currency fluctuations occur not only in production
but also in other variables such as employment, investment, utilization, interest rate and
price level.
4. Another important aspect of business cycle is that the investment and use of long-term
consumer goods such as cars, houses, refrigerators are significantly affected by cycling
fluctuations. As emphasized by J.M. Keynes, investment is highly volatile and unstable
as it depends on the expected profitability of private investors.
5. An important feature of business cycles is that the use of short-term goods and services
varies greatly with different stages of business cycles. Previous business cycle data show
that households maintain a high level of stability in long-term supply of goods.
6. The immediate effect of depression and elasticity on the structure of the asset. When
depression sets in, the inventory begins to accumulate more than the desired level. This
leads to cuts in the production of goods. Conversely, when recovery begins, the gain is
less than the desired level. This encourages entrepreneurs to place more orders for
manufactured goods and encourages investment in larger assets.
7. Another important feature of business cycle is that profits change more than any other
type of income. The emergence of business cycles creates a lot of uncertainty for
entrepreneurs and makes it difficult to predict the state of the economy. In times of
discouragement the income may be negative and many businesses collapse. In the free
market the economic benefits are justified by the payments required when entrepreneurs
are urged to bear the uncertainty.
8. Finally, business cycles are of a global standard. That is, once they start in one country,
they spread to other countries through trade relations between them. For example, if there
is an economic downturn in the USA, which exports large imports, it will create a decline
in demand for exports whose exports could be disrupted and lead to inflation as well.

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IMPACT ON BUSINESS OPERATIONS

Macroeconomics Defined
Betty is a small business owner of a successful coffee shop in a large metropolitan city. She is
thinking about expanding her operations by opening a new shop in another part of town.
However, before she takes the plunge, she needs to examine the current macroeconomic
conditions to determine whether expansion is a good idea right now.
Macroeconomics relates to how an overall economy works and performs. In other words, it looks
at the big picture instead of focusing on individuals. Let's take a closer look at some key
macroeconomic factors that Betty should consider before expanding her business.
Unemployment Rate
Betty needs to pay special attention to the unemployment rate, which is the percentage of people
in the workforce that are unemployed and actively looking for work. A high rate of
unemployment is a mixed bag for Betty but is generally not good for her expansion plans.
A high rate of unemployment may mean that Betty will be able to hire employees at a lower
wage. This will save her money and improve her profit margins. However, Betty needs
customers with pay checks so they can spend some of that money on espressos, lattes and
cappuccinos. In other words, generally speaking, since people that are unemployed don't have
much, if any, disposable income, high unemployment tends to lower demand for goods and
services, which hampers economic growth and business expansion.
Inflation
Betty also needs to pay attention to inflation, which is the general rate of price increase in an
economy. If the inflation rate is high, the costs for goods and services will increase. If the
inflation rate is too high, people may decide to change their purchasing decisions.
For example, if the price of the premium coffee beans Betty buys increases significantly, she'll
have to either increase her prices or take a hit on net revenue. If she increases her prices too
much, she may lose customers who decide to purchase cheaper java elsewhere or make it at
home.
Economic Output
Betty will also want to pay attention to the rate of growth or decline in the economy's economic
output, which is measured by the gross domestic product (GDP). GDP is the total value of all
goods and services produced in an economy during a specific period of time. If an economy’s
output is growing, this means that people are employed and spending money and businesses are
investing. Unemployment tends to increase and investments decline.
Fall in Interest rate

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A rise or falling interest rates affects business activities as well as the buying habits of the
company's customers. Consumers take advantage of low interest rates by buying houses, cars etc
because the interest payments they will have to make on loans to buy such items will be low. So
company during such phase of low interest rate generally expand because of the increase in
demand for its products as well as the lower cost of expansion.
Government Spending
Government mostly gets money from taxation; Therefore, higher government expenditures
implies higher taxation which leads to low disposable income left at consumers hand which
further leads to reduction of consumer spending on goods of various firms. On the other hand,
say government is spending higher on schools / education sector; this would lead to increase in
income of businesses that supply schools with books etc.

RELATED TOPICS TO BUSINESS CYCLE

(i) Business cycles are fundamentally vacillations within the generation levels of economies
over and underneath the slant of the equilibrium levels. But why do economies vary?
There are numerous variables which are said to be dependable for it, as per the experts:
(i) Financial flimsiness and instability (due to coherent or irrational desires) may
debilitate investments thereby lessening development within the long-term.
(ii) A need of the inventive devastation (i.e. development) may put the economy in a droop
or lull in its generally production
(iii) Anti-inflationary government arrangements (uncommonly when common races are
nearing) may coordinate the fascination of financial specialists within the economy.
(iv) Unforeseen fiascos may cause economies to change.
Business cycle alludes to the variances in financial movement happening frequently in capitalist
social orders. These changes happen within the frame of alter in volume of business, yield and
pay. The arrangement of changes in trade cycle happens regularly and in a comparative design.
Business cycles are measured utilizing GDP.
Business cycles are important to trade associations that utilize the data to foresee future
execution with the purposeful of accomplishing competitive advantage.
business cycle and unemployment *
Unemployment increments amid commerce cycle subsidence's and diminishes amid trade cycle
developments (recuperations). Swelling diminishes amid retreats and increments amid
developments (recoveries). *business cycle, yield and work * The trade cycle influence yield and
business in capital products businesses and buyer solid products businesses more seriously than
in businesses creating customer nondurables since the amount and quality of buys of nondurables
will decrease, but not as much as will buys of capital merchandise and devour
business cycle and financial growth

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The greatest issue of the commerce cycle is that a retreat speaks to a expansive wastage of
assets. ... The instability made by a unstable commerce cycle tends to cause lower speculation,
and this may lead to lower long-term financial growth.
business cycle and cash supply
According to the Nobel Laureate in Financial matters, Milton Friedman, the root of the trade
cycle is the vacillations within the development rate of cash supply. ... While the increment
within the development rate of such cash invigorates non-productive exercises, a drop in its
development rate undermines those exercises.
business cycle and inflation
Unemployment increments amid trade cycle retreats and diminishes amid commerce cycle
developments (recuperations). Swelling diminishes amid subsidence's and increments amid
extensions (recuperations).
(a) Extension is the stage of financial cycle when development rates choose up, movement is
investing and times are great. On the opposite, compression is the stage where development rates
drop down, action levels decrease and times are discouraging. A Further, a trough alludes to the
inversion point in a commerce cycle where the withdrawal stage turns towards an extension
stage. Based on over, the right alternatives are to begin with, moment and third.
(b) moo
diminished; falling
(c) crest
trough
(d) When extension stage of a trade cycle is going on,
everybody around is very helpful, businesses are contributing increasingly to development assist
and work openings are tall and finding a work is easier. Based on this, the right choice is the
primary alternative
CONCLUSION
Business cycle refers to the fluctuations in economics activity occurring regularly in capitalist
societies these changes occur in the form of changes in volume of employment, output and
income. The sequence of changes in business cycle occur frequently in a similar pattern.
Business Cycle Phase are identified as having four distinct phases: expansion, peak, contraction,
and trough.
COMMON MISPERSEPTIONS:
An expansion isn't essentially financial development. When an economy is recouping from a
recession, it is within the extension phase of the commerce cycle, but it isn't encountering
financial development. Financial development happens when the potential and genuine yield of a

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country increments over time. That development is either shown by the dashed, upward-sloping
drift line (the development drift) within the trade cycle show, or by an outward move of the An
economy can create past its full business level of yield. Assets can be overutilized, such as
laborers working exceptionally, exceptionally long hours. Be that as it may, as any understudy
who has ever pulled an all-night think about session for an exam knows, you can’t support that
kind of exertion for long.

THE END

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