BUSINESS CYCLE

Known as trade cycle.

Important element of economics.
Regular fluctuations in economic activity.
Refers to a wave-like fluctuation in aggregate
economic.
Regard to national income, employment and output.
According to Keynes:

a business cycle is composed of periods good trade
with rising prices and low unemployment percentages,
followed by periods of bad trade with falling prices and
high unemployment percentages.

A business cycle is an economy-wide phenomenon
which prevails in all industries.
A business cycle is a wave-like movement in economic
activity where an expansion is followed by a
depression.
Business fluctuations occur periodically and tend to be
recurrent in nature.
Expansion and contraction in a business cycle are self-
reinforcing and cumulative in effect.
A business cycle is characterized by upward and
downward movements.
Expansion (Trough Peak) = Output and
employment increase.
Contraction (Peak Trough) = Output and
employment decline.
Goes through four different stages or phases:
Peak or boom
Recession
Trough
Recovery

Peak or Boom
Full employment where all available resources are
employed.
High level output trade, increasing effective demand
and higher employment demand.
Creates more investments that leads to an increase in
wages and price of inputs.
Overfull employment (jobs > workers)
End when expansion slow down.

Recession
Decrease in the volume of output trade and
transactions.
Increase in the level of unemployment.
Reduction in aggregate income .
Decline in consumption expenditure and investment
level.
This phase also called contraction.
Normally lasts for six-month period.

Trough
Ends when the real GDP (KDNK) stop falling.
Minimum point is called a trough.
Overall level of economic activity will fall to the lowest
level.
Unemployment rates increase.
Recovery
Level of output and employment expands towards full
employment during this phase.
Recovery period is initiated by:
Government expenditure
Changes in production techniques
New innovations
Exploitation of new sources of energy

The increase in government expenditure will stimulate
the demand for consumption of goods and will increase
the demand of the capital goods.
Employment level, output, income, wages, prices, and
profits will start increase.
Through the multiplier effect, the economy will move
upward rapidly.
Phase of a Business Cycle Economic Activity
Peak Output Maximum Level
Unemployment Lowest Level
Recession Output - Declines
Unemployment - Increases
Trough Output Minimum Level
Unemployment Highest Level
Recovery Output - Increases
Unemployment - Declines