TRADE/BUSINESS CYCLE

Macro Economics SYBAF

MICRO VS. MACRO

Microeconomics: The study of personal, or small finances.

Individuals, families or businesses

Macroeconomics: The study of economic systems on a large scale

National or Global economies

GROSS DOMESTIC PRODUCT

The total value, in monetary terms, of all final goods and services produced within the nation each year

WHAT DOES THE GDP TELL US?

If the GDP is larger than last year the economy is expanding (getting bigger) If the GDP is smaller, the economy is shrinking (getting smaller)

TRADE CYCLES/BUSINESS CYCLES

The term trade/business cycle (or economic cycle) refers to economy-wide fluctuations in production, trade and economic activity in general over several months or years in an economy organized on free-enterprise principles It is the upward and downward movements of levels of GDP and refers to the period of expansions and contractions in the level of economic activities (business fluctuations) around its long-term growth trend These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth and periods of relative stagnation or decline

DEFINITION

According to J. M. Keynes A trade cycle is composed of periods of good trade characterised by rising prices and low unemployment percentages with periods of bad trade characterised by falling prices and high unemployment percentages

TRADE/BUSINESS CYCLE
The

Trade/Business Cycle allows people to understand the direction the economy (GDP) is going (growing or shrinking) and plan accordingly.

The

economy follows the Business Cycle regularly.

PHASES OF THE TRADE/BUSINESS CYCLE

Expansion

(Growing)

Peak

(Top) Contraction (Shrinking) Trough (Bottom)

BUSINESS CYCLE
Peak Peak

Trough

EXPANSION
During

a period of expansion:

Wages increase Low unemployment People are optimistic and spending money High demand for goods Businesses start Easy to get a bank loan Businesses make profits and stock prices increase

PEAK
When

the economic cycle peaks:

The economy stops growing (reached the top) GDP reaches maximum Businesses cant produce any more or hire more people Cycle begins to contract

CONTRACTION
During

a period of contraction:

Businesses cut back production and layoff people Unemployment increases Number of jobs decline People are pessimistic (negative) and stop spending money Banks stop lending money

TROUGH
When

the economic cycle reaches a trough:

Economy bottoms-out (reaches lowest point) High unemployment and low spending Stock prices drop

RECESSION/DEPRESSION
A

prolonged contraction is called a recession (contraction for over 6 months) recession of more than one year is called a depression

CAUSES OF BUSINESS/TRADE CYCLE

Four variables cause changes in the Business Cycle: 1. Business Investment
When the economy is expanding, sales and profit keep rising, so companies invest in new plants and equipment, creating new jobs and more expansion. In contraction, the opposite is true Interest Rates and Credit
Low interest rates, companies make new investments, adding jobs. When interest rates climb, investment dries up and less job growth

2.

3.

Consumer Expectations
Forecasts of an expanding economy fuels more spending, while fear of a recession decreases consumer spending

4.

External Shocks
External Shocks, such as disruptions of the oil supply, wars, or natural disasters greatly influence the output of the economy Ex. 1992-2000 was the longest period of expansion in U.S. history. Early in 2001, signs of contraction appeared, though the Bush administration denied it. The Sept. 11th 2001 terrorist attacks quickly caused the business cycle to shift into a contraction.

IMPACT OF GLOBAL TRADE CYCLE ON INDIAN ECONOMY

The effect of globalisation over the Indian Economy since 1991 is evident in the rising share of trade in Indias GDP

Share of merchandise imports & exports increased from 21.2 % in in1997-98 to 34.7 % in 2007-08

Indias rapidly growing integration with the world economy been the cause of the penetration of global recession to the Indian Economy

IMPACT OF GLOBAL TRADE CYCLE ON INDIAN ECONOMY (CONT.)

Due to the fall in the global credit supply Indian Corporate sector shifted their demand to the domestic banks and withdrew their investments from the domestic money market mutual funds. As a result NBFIs came under redemption pressure from the domestic investors leading to pressure in the money and capital markets. Due to reversal of capital inflows the foreign exchange market came under pressure To the external obligations Indian corporates converted funds raised domestically into foreign currency thus leading to a downward pressure on rupee and depreciation of rupee by over 20 times

REMEDIAL ACTIONS TAKEN BY RBI

RBI targeted three objectives for the remedial actions

To maintain a comfortable liquidity position To augment foreign exchange liquidity To maintain credit supply

RBI reversed its earlier followed dear money policy to cheap money policy
Reduced the interest rate Decreased CRR Expanded and libralised the refinance facilities for export credit

REMEDIAL ACTIONS TAKEN BY GOVERNMENT OF INDIA

Safety net for rural poor

A farm loan waiver package

Salary hike for the Central Government employees Counter-cyclical fiscal policy

Emergency provision of Fiscal Responsibility and Budget Management Act to seek relaxation from the fiscal targets Two fiscal stimulus packages between December 2008 to January 2009 accounting to 3 % of GDP consisting of

additional public expenditure Government guaranteed funds for infrastructure spending Cuts in indirect taxes Expanded guarantee cover for credit to micro land and small enterprises Additional support to exporters