3 Business Cycles.pdf

Business Environment PGEMP Dr. Pallavi Mody Email: [email protected] @SPJIMR Courage. Heart  GDP growth is uneven in a market economy...

Business Environment PGEMP Dr. Pallavi Mody Email: [email protected] @SPJIMR Courage. Heart  GDP growth is uneven in a market economy India's GDP growth 2014-15 to 2023-24 A country may be poised for higher GDP growth in 10 the long run but in the short run the growth is often 8 uneven. The Potential Real GDP growth may depend on 6 fundamental factors e.g. resources, population, 4 technology, productivity… The Actual Real GDP growth may respond to the 2 shocks e.g. financial crisis, pandemic, mismatches in 0 demand-supply and as a result may deviate from 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 potential. -2 Business cycles are part of the market economy. -4 -6 -8 @SPJIMR Courage. Heart  What are Business Cycles? The swings of boom and bust in market economies are known as business cycles. @SPJIMR Courage. Heart  Business Cycles Terminologies The phases of economic expansion The phases of economic contraction 1. Recovery 1. Slowdown 2. Overheating 2. Recession 3. Peak 3. Trough (If prolonged it is Depression) The phase of economic expansion is associated with The phase of economic contraction is associated with Rising prices of goods and assets, Falling prices of goods and assets, Rising Employment Falling profits Rising profits Falling employment Optimism and high business confidence. Pessimism and low business confidence. This results in rise in consumption, investment and This results in fall in consumption, investment and employment employment and the economy enters a positive feedback and the economy enters a negative feedback loop. loop. @SPJIMR Courage. Heart @SPJIMR Courage. Heart  Are recoveries of uniform shape? @SPJIMR Courage. Heart  Impact of COVID 19 and WEO Oct 2021 What would be the impact of the economic condition on the countries? Recession GDP Growth Recovery Income distribution How will the recovery be and how will the businesses strategize? V-shaped, U-shaped, Z-shaped K-shaped Source: IMF WEO Oct 2021 @SPJIMR Courage. Heart  Why do Business Cycles Occur? Economic Theory provides explanation Mismatch between The Aggregate demand & The Aggregate supply @SPJIMR Courage. Heart  What is aggregate demand? Aggregate Demand (AD) AD=Y(GDP) = C+I+G+NX Demand for consumption goods(C), Demand for Investment goods (I), Demand for goods and services by the government (G) NX represents exports-Imports (X-M) It responds to price level, with fall in price the consumers can buy more leading to higher GDP The AD shifts due to any event other than price that shifts C, I, G or NX @SPJIMR Courage. Heart  What is Aggregate Supply? Aggregate Supply relates to the goods and services available for supply given the availability of factor resources. The Aggregate Supply Curve slopes upwards since a rise in the price level makes it more attractive for the suppliers to supply The aggregate supply curve shifts due to technology, improvement in productivity, new discoveries of resources….. @SPJIMR Courage. Heart  Genesis of fluctuation in the economy If AS=AD in the short run, the economy finds equilibrium, whatever is produced gets consumed and the economy remains stable. If AS>AD in the short run, because of the excess production, there is glut in the market. Prices, profits, employment decline and the economy goes through recession. If AS