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CA – Foundation CA- Intermediate CA- Final

CA-FOUNDATION
CRASH COURSE MATERIAL

Business Economics
Chapter 5 – Business Cycle

By Prof. Shashi Kiran.M

Advait Learning 9353164696 / 8660386382

www.advaitlearning.com
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Economics Chapter 5

Business Cycle
It is also known as Economic cycle or Trade cycle.
Each and every country has to go through fluctuation in trade cycle, due to which if effects
• Output • Un-Employment
• Price level • Bank Credit
• Profit • Interest Rate Factors effect by BS
• Demand • Standard of Living
• Income • GDP

Business Cycle is recurrent & occurs periodically i.e. occurs again & again but not always at regular
intervals.
Business Cycle doesn’t have specific duration of time, few BC have short ending & few BC have long
ending.

Phases of Business Cycle

1. Expansion (Also Called BOOM or UPSWING)
2. Peak or Prosperity
3. Contraction (Also called DOWNSWING or RESESSION)
4. Trough or Depression

Every business cycle starts from TROUGH (lowest point or bottom point of business cycle) and
passes through Recovery stage followed by a period of EXPANSION and reached PEAK.

After reaching PEAK position there is a declining phase of Contraction & finally reached TROUGH.
Again the Business Cycle continues with similar ups & downs.

EXPANSION PHASE
When there is an expansion of Output, income, employment, price & profit there is also a raise in
Standard of leaving.
• High level of Output & trade
• High level of effective demand
• High level of income & Employment
• In-voluntary un-employment is almost Zero

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Economics Chapter 5

• Raising interest rate

• Large expansion of bank credit
• Effective utilisation of Capital & Investment
• Overall Business optimisation.

Note:
In this phase an Economy faces Inflation.
Due to full employment of resources, the level of production is maximum & there is a raise
in GDP.

PEAK
Due to high level of economic activity, it causes a raise in price & profit, there is an Up-swing in an
economic activity & economy reaches its Peak position, It is also called as BOOM period.

It is the top level or highest level of business cycle, where a manufacturer will end-up in gaining high
profit level, It usually occurs for the short term.

CONTRACTION
The turning point from peak to depression is treated as Contraction/ Recession Phase.
During this phase the economic activity slowdowns, where demand starts falling, the overall
production reduces & further investment plans are given up.

• There is a steady decline in output, income, employment & profits.

• It reduces bank credit & Investment opportunities
• Expansion of business stops, stock market falls, business creations will reduce & people
starts loosing there job.
• The business man loses confidence & becomes pessimistic (Negative mindset)
• The increase in un-employment causes a sharp decline in income & aggregate demand.

TROUGH / DEPRESSION
When there is a continues decrease of output, income, employment, price & profit there is a fall in
standard of living & Depression sets in.
• Fall in volume of output & trade
• Fall in Income & raise in un-employment
• Decline in consumption & demand
• Contraction of Bank credit (financial crisis)
• Interest rates will fall
• Firm shutdowns several production facilities
• Underutilisation of resources & fall in GDP

Aggregate economic activity is at the lowest, Causing a decline in price & profit until the economy
reaches its TROUGH(lowest point)

Note :
In this phase an Economy faces Deflation.
Due to less interest rate in bank & un-employment, People starts holding liquid money &
availability of bank credit decreases.

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Economics Chapter 5

RECOVERY/ RIVIVAL
• The turning point from depression to expansion is treated as recovery phase.
• During the period of recovery, there will be expansion & raise in economic activity, demand
starts raising, production increases & causes an increase in investment (Business expansion
takes place)
• Stock markets are activated
• Business man becomes optimistic (positive minded)
• Employment starts increasing and slowly revival emerges into expansion.

Economic Indicators
Business cycle involves periodic fluctuations of economic activity, such as production & employment.
Economist uses statistical tools to predict the further performance of business cycle & analyse it,
they are called as Indicators.

They try to predict the next phase of business cycle.

They are not always accurate.

Types of Indicators
1. Leading Indicator :
It is a measurable economic factor that changes before the economy starts to follow a
particular change/trend/pattern.

2. Lagging Indicator:
It is a measurable economic factor that changes only after the economy starts to follow a
particular change/trend/pattern.

3. Co-incidental Indicator:
It is a measurement that shows the current state of economy, this economic indicator move
along with the economy but it does not show which way the economy is heading, but it tells
us where we are at present.

Features of Business cycle

1. Occur periodically
2. It has distinct phases
3. It generally originates in Free market economy or Capitalistic economy.
4. Secondary & tertiary sector is more prone to business cycle then Primary sector/Agriculture.
5. It is difficult to predict Business cycle before they occur.
6. It effects to all the economic activities
7. It starts in one nation & effects other nation
8. It effects the well-being of a society

Note :
Business cycle is used in decision making purpose of an organisation like
• Policies creation
• Profit & wealth maximisation
• To take right decision at right time

Businesses whose fortune are closely linked to the rate of economic growth are referred to
as “Cyclical business”

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Economics Chapter 5

Causes of Business Cycle

A. Internal Cause
• Fluctuation in effective demand -KEYNES
• Fluctuation in Investment
• Change in Government spending’s & tax rate
• Money Supply – Inflation & deflation
• Psychological factors of business man – Pessimistic & Optimistic mind set -PIGOU
COBWEB THEORY -NICHOLAS KALDOR
B. External causes
• War
• Post war re-construction
• Populational growth
• Technological changes
• Natural factors – Drought, famine, earthquake etc.

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