BUSINESS CYCLES

● Business cycles are comprised of concerted cyclical upswings and downswings in

the broad measures of economic activity—output, employment, income, and sales.
● The alternating phases of the business cycle are expansions and contractions (also
called recessions)
● This sequence of changes is recurrent but not periodic.
● The business cycle is an example of an economic cycle.

● Recession-
A recession is actually a specific sort of vicious cycle, with cascading declines in output,
employment, income, and sales that feedback into a further drop in output, spreading rapidly
from industry to industry and region to region
It is generally identified by a fall in GDP in two successive quarters.

● Recovery

On the flip side, a business cycle recovery begins when that recessionary vicious cycle
reverses and becomes a virtuous cycle, with rising output triggering job gains, rising
incomes, and increasing sales that feedback into a further rise in output.

MEASURING AND DATING BUSINESS CYCLES

The severity of a recession is measured by the three D's: depth, diffusion, and duration.
1. A recession's depth is determined by the magnitude of the peak-to-trough decline in
the broad measures of output, employment, income, and sales.
2. Its diffusion is measured by the extent of its spread across economic activities,
industries, and geographical regions.
3. Its duration is determined by the time interval between the peak and the trough

The strength of an expansion is determined by how pronounced, pervasive, and

persistent it turns out to be. These three P's correspond to the three D's of recession.

An expansion begins at the trough (or bottom) of a business cycle and continues until the
next peak, while a recession starts at that peak and continues until the following trough.
Discuss historical business cycles and important events that led to recessions and
depressions in the last century
● The pre-WWII experience of most market-oriented economies included deep
recessions and strong recoveries. However, the post-WWII recoveries from the
devastation wreaked on many major economies by the war resulted in strong trend
growth spanning decades.
● When trend growth is strong—as China has demonstrated in recent decades—it is
difficult for cyclical downswings to take economic growth below zero, and into
recession.
● For the same reason, Germany and Italy did not see their first post-WII recession
until the mid-1960s, and thus experienced two-decade expansions.
● From the 1950s to the 1970s, France experienced a 15-year expansion, the U.K. saw
a 22-year expansion, and Japan enjoyed a 19-year expansion. Canada saw a
23-year expansion from the late 1950s to the early 1980s.
● Even the U.S. enjoyed its longest expansion until that time in its history, spanning
nearly nine years from early 1961 to the end of 1969.

Trend - Stock Prices and Business Cycles-

 ● In the post-WWII period, the biggest stock price downturns usually—but not
always—occurred around business cycle downturns (i.e., recessions).
●
● Exceptions include the crash of 1987 in US stock market, which was part of a
35%-plus plunge in the S&P 500 that year, its 23%-plus pullback in 1966, and its
28%-plus drop in the first half of 1962

Trend - Business cycles and the development status of nations

● Business cycles are different in rich and poor countries-because the industries in
which each group of countries specialize respond differently to domestic and foreign
shocks.
● Business cycles are less volatile in rich countries than in poor ones.

Business Cycle Measurement in India-

Two distinct periods emerge in the analysis of business cycles in India: the pre 1991 period
and the post 1991 period.
● In the India of old, business cycle downturns in the pre-liberalisation period were
associated with drought or oil price hike and saw sharp declines in GDP. There were
no investment-inventory cycles or periods of expansion followed by periods of
contraction that are typically seen in industrialised countries.
● India faced a severe Balance of Payments crisis in the early nineties. While the crisis
hit India in 1990-91, it had been building for half a decade prior to the crisis year.
● The fiscal deficit was rising and exchange rate rigidity led to a rise in current account
deficit.
● The restrictive framework governing foreign investments resulted in current account
deficit translating into rising levels of external debt.
● To address the crisis like situation, a series of reforms towards a market oriented
economy were introduced.
● Devaluation and transition to a market determined exchange rate, phased reduction
of import duties, encouragement to foreign direct and portfolio investment and
abolition of industrial licensing with greater role for private sector investment were
some of the key reforms introduced in the nineties.

Table 1: Dates of turning points in GDP and their summary statistics

Phase Duration Amplitude
(in (in per
quarters) cent)
Acceleration 1996-Q4 1999-Q3 12 3.6
Deceleration 1999-Q4 2003-Q1 13 3.3
Acceleration 2003-Q2 2007-Q2 17 2.5
Deceleration 2007-Q3 2009-Q3 9 2.3
Acceleration 2009-Q4 2011-Q2 7 1.3
Deceleration 2011-Q3 2012-Q4 6 0.9
Average Average
duration amplitude
 (in (in
quarters) percent)
Acceleration 12 2.5
Deceleration 9.3 2.2