Busness cyce Nature of busness cyceThe periodic rise and decline of economic activity.Busness does not move eveny.The forces of demand and suppy do not aways move together. Industra revoutonDurng Spansh tmes perods of food shortage and scarcty as we as perods of abundance and prosperty.1929 1933: most severe depressons; New York stock market crash and spread through out the word. Rhythm n the economc actvtyDownward swng of busness cyce s aways foowed by an upward swng. Length of busness cyceNo two busness cyces are of the same duraton; they vary n ength and severty.In US have an average of 4years.Engand from 1793-1920 was 5 years and 9 mos.France from 1838-1920 was 5 years.Germany from 1847-1940 was 5 yearsCyces are generay onger n ess deveop countres. Amptude of Busness cycePast may be a good measure for comng cyce.Hghest boom 10% above normaThe upswngs of busness actvty reaches 25% above norma and about 20% to 25% on downward swng. Secuar trend, seasona varatons and accdenta varatons Secuar trendLong-tme trend of busness actvty; t s a smooth upward or downward movement of busness over a ong perod of years.Movement of busnesses that can be determned not durng a snge busness cyce but after many cyces have been competedAn upward movement may take pace wthn 50 years or more before any downward trend s observed. Seasona varatonsOccur more or ess reguary wthn a year because of changes n weather and exstence of the usua natona or regous hodays. Pantng and harvestng seasons are brsk seasons n the Phppnes. Chrstmas and Easter. Accdenta VaratonsUnforeseen events: wars, strkes, ood, drought, re, and earthquakes. Ahects busness actvty.Undue busness movements that resuts from fortuitous events shoud be consdered abnorma. Phases of the Busness cyce Prosperty PhaseHgh prces and great busness actvty.Everythng s boomngHgh prces are yedng arge protsWth ndustres at top speed: arge demand for abor and very tte unempoyment.Wages are hgh n common wth hgh prces for a knds of commodtes. Increased voume of saes and forward buyng of commodtes.Optmsm pervades -> voume of trade ncreases -> ncrease n prces and spreads buoyancy. A arge demand for credt durng the perod of prospertyBanks have very ow reserves because of arge oans and dscountsDemand for credt -> Interest rates ncreases Crss phaseProsperty sows downFactores are n fu bast n order to meets orders suddeny nd that they can no onger dspose of the same voume of goods.Prces ncrease as beforeDemand for goods decreases reatve to the suppyMargn of prots shrnksTrade sows downIndustra actvty curtaedLarge quantty of unsod goodsFactory reduces ther output > reduces ther abor force > unempoymentReducton of wages -> curtang purchasng power. To nance ther actvtes, they use CreditLqudaton forced sae to meet ther obgatons whch nvoves a oss; t may resut to crss.Panic when the nanca nsttutons of the country are n unsound poston and they can not meet ther obgatons Depresson phaseBusness had to go read|ustmentPessimism decnng prces and tght credtVoume of saes reduced because of fang prces.Prces are fang -> seers become more anxous to se -> prces drop to ower eveClosing factories sweng of unempoyment, curtanng purchasng power, decreasng the demand for goodsBanks penty of money n ther vauts -> Busness men are afrad to borrow- penty of de funds awatng borrowers -> banks reduces the rate of nterest; money and credt strngency s oosened. -cost of producton are ow as unempoyed men are wng to get a |ob; cost of raw materas s ow; credt at ow rate of nterest- because of the abundance of de funds. Recovery PhaseFactors of recovery: ow prces of raw materas, ow wages, and nterest ratesRepacement of machnes and other equpmentsFactores have to be reparedIncrease n demand for goods and abor. Consumers have to repace ther cothng and other needs.Stocks => retaers must repensh and have to pace ther orders to whoesaers.Manufacturers have to ncrease ther demand for raw materas and abor. Demand for abor ncrease -> unempoyment w decrease -> purchasng power ncrease.Ide funds w be oaned as nterest rates are owRse n the prce of securtes stmuates busness actvty. Theores of busness cyce Sun-spot theoryW. Stany |evons busness cyces are caused by soar radaton. Spots on sun ahects the sun of the weather, thus ahectng the deveopment of crops. psychoogcaFuctuaton of busness actvty to the uctuaton optmsm and pessmsm among busness men. Sack season caused by lack of confdence among the eaders of busnessBusness men become optimistic (business man ill hire more business! e"pansion# about the future and are apt to expand ther busness unduy. Spreadng optmsm a around -> ncreasng output beyond the capacty of the peope to consume.When producton outruns consumpton; market s gutted wth unsod artces, wave of pessmsm foow. OverproductonStagnaton n busness When the amount produced exceeds the amount that can be consumedEhects of overproducton: surpus = decrease n prot -> decrease n prce.Goods cannot be sod at a prot. maad|ustmentCosey reated to the theory of overproducton.The purchasng power of the consumers may be adequate, but enterprsers often ms|udge what the pubc wants over savngPersons possess arge purchasng power who woud not spend t on consumpton goods. Saved ncome nvested n the ndustres n form of new equpment and producers goods to produce more goods ntended for na consumer, thus ncreasng n amount of consumpton of goods that cannot nd a buyer. Bank credt theoryBanks nuence busness actvty through the expanson or contracton of credt. Increase n nterest rates -> decrease n nvestments -> decrease n demand and ncome. Sef generatng By Prof. Wesey C. Mtche, busness cyces are sef generatngProsperty generates the crcumstances that eads to crss that breeds depresson and n tme brngs revva of actvty. Demand > suppy Other 3 groups: Physical theores that are concerned wth changes n the physca envronment ke sun-spot theory of |evonsEmotional theores whch assocate busness uctuatons wth cyces of optmsm and pessmsm of busness meninstitutional attrbute busness cyces to busness practces ke maad|ustment theory. Contro of busness cyce Stabzaton of busness cyceThe productve forces must be organzed n such a way as to secure a steady producton of goods. Contro of credtBank credt s the most mportant factor to be consdered n the changes n the prce eve. Contro of pubc worksBy the governmentAdoptng a pan to construct pubc budngs, roads, brdges, and other pubc works durng the perod of sack busness rather than durng the perod of prosperty.