Business Cycle

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Business Cycle #0 Business Cycle #1 Business Cycle #2 Business Cycle #3 Business Cycle #4 Business Cycle #5 Business Cycle #6 Business Cycle #7 Business Cycle #8 Business Cycle #9

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BUSINESS CYCLE v The term business cycle refers to the recurrent ups and downs in the level of economic activity, which extend over several years. v Individual business cycles may vary greatly in duration and intensity. v All display a set of phases. Business Cycles Business Cycle : Diagram Secular growth trend Expansion slump Peak 0 Total Output BUSINESS CYCLES The Business Cycle • Business Cycles --Periodic rises and falls that occur in economies over time. • Four Phases of Long-Term Business Cycles:1. Economic Boom 2. Recession –Two or more consecutive quarters of decline in the GDP. 3. Depression –A severe recession. 4. Recovery –When the economy stabilizes and starts to grow. This leads to an Economic Boom. 2-4 PEAK Time GROWTH TREND v Peak or prosperity phase: .Real output in the economy is at a high level .Unemployment is low .Domestic output may be at its capacity .Inflation may be high. Level of business activity v Contraction or recession phase: .Real output is decreasing .Unemployment rate is rising. .As contraction continues, inflation pressure fades. .If the recession is prolonged, price may decline (deflation) .The government determinant for a recession is two consecutive quarters of declining output. Level of business activity Time RECESSION GROWTH TREND Level of business activity Time Slump GROWTH TREND v Trough or depression phase: .Output and unemployment “bottom out” .This phase may be short-lived or prolonged .There is no precise decline in output at which a serious recession becomes a depression. .Lowest point of real GDP Level of business activity Time RECOVERY GROWTH TREND v Expansionary or recovery: .Real output in the economy is increasing .Unemployment rate is declining .The upswing part of the cycle. BusinessCycle of Pakistan BUSINESS CYCLE RECESSION TROUGH RECOVERY PEAK First B. Cycle (1949-69) 1949-50 to 1959-60 (11 years) 1959-60 1960-61 to 1968-69 (9 years) 1968-69 Second B. Cycle (1969-1991) 1969-70 to 1978-79 (10 years) 1978-79 1979-80 to 1990-91 (12 years) 1990-91 Third B. Cycle (1991 -?) 1991-92 to 2004-05 * (14 years 2004-05 * 2005-06 to ? Features of Business Cycles Variable Expansion Peak Recession Trough Industrial Production Increase Rapid increase Decline Lowest Demand Increase Highest Decline Lowest Prices Increase Rapid increase decline rapid decline Cost Increase Rapid decrease Gradual decline Rapid decline Investment Increase High Falls slowly Falls rapidly Employment Gradual increase Rapid increase Falls Rapid falls Bank credit Liberal Very liberal Falls Rapid falls GDP Growth Rate pakistan-gdp-growth.png A comparison Pakistan • So if we measure in relation to where the structure of economy, agriculture has come down from 50% to 20%. • Within agriculture sector, there is a change i.e. major crops are only 36% of agriculture value added and 14% are minor crops, fisheries, orchards, fruits and vegetables. Thus, we are moving in a direction where the same land and same resources are being used more efficiently in order to produce U.S.A • . As a contrast, agriculture is only 2.5% in the US having a population of 300 million, out of which they not only feed the entire population, but also export to the rest of the world. Therefore, it is important to understand that when it is said that agriculture is producing/contributing more, it is the productivity of agriculture rather than the share of agriculture in GDP. Indicators of Business Cycles There are variables other than real GDP that influence the business cycle. They are classified into two: (1) Leading Indicators: generally change before real GDP changes. Can be used to forecast future output. (2) Coincident Indicators:tend to change at the same time as real output changes eg: as real output increases employment and salesrise Recessions since 1950 show that duration and depth are varied: PeriodDuration in monthsDepth(decline in real GDP) 1953-5410—3.0% 1957-588—3.5% 1960-6110—1.0% 1969-7011—1.1% 1973-7516—4.3% 19806—3.4% 1981-8216—2.6% 1990-918—2.6% 20018app. —3.3% • The Leading Indicator System …provides a basis for monitoring the tendency to move from one phase to the next. …assesses the strengths and weaknesses in the economy …gives clues to a quickening or slowing of future rates of economic growth …indicates the cyclical turning points in moving from the upward expansion to the downward recession, and from the recession to the upward recovery. How Indicators Monitor the Four Phases of the Business Cycle .Leading indicators anticipate the directionin which the economy is headed. .The coincident indicators provide informationabout the current status of the economy 1)changing as the economy moves from one phase of the business cycle to the next 2) telling economists that an upturn or downturn in the economy has arrived. .Lagging indicators change months after a downturn or upturn in the economy has begun and help economists predictthe duration of economic downturns or upturns. .Based on the theory that expectations of future profits are the motivating force in the economy. .Companies may expand production of goods and services and investment in new structures and equipment,whenbusiness executives believe that their sales and profits will rise. .When they believe profits will decline, they reduce production and investment. These actions generate the four phases of the business cycle. .Innovation .Political events .Random events .Wars .Level of consumer spending .Seasonal fluctuations .Cyclical Impacts —durable and non durable Causes of Fluctuations Real GDP Peak Peak Trough One Cycle Where are we lagging behind? • In 1969, Pakistan exports of manufactured goods were higher than the combined exports of Indonesia, Malaysia, Philippines and Thailand. • In 1960’s Korea emulated Pakistan in its five years planning process. • But, The tragedy is that even a country such as Vietnam which was completely devastated by the war has now overtaken Pakistan. • Ten years ago, India which was way behind Pakistan (till 1990’s) is now way ahead. • As an economist the biggest challenge is: how can we organize ourselves to improve our economy. Challenges to Pakistan’s Economy which leads to recession. • We Import More and Export Less. • We Consume More and Save Less. • Government Spends More than it Earns as Revenues • Our Share in the World Trade is Shrinking • We Face Energy and Water Shortages • Crisis of Governance and Implementation Weaknesses • Political Stability, Law and Order/Security Challenges to Pakistan economy 1. We Consume More and Save Less. • Out of every hundred rupees of our national income, we consume 85 rupees and save only 15 rupees. • Pakistan’s saving rate is 6%. We need at least 24-25% investment rate to grow, and if we want to rely on domestic savings, your saving rate should be 25%. • India has 34% saving rates. While China

 

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