Economic Principles and the Financial Services

Economic Principles and the Financial Services

Unit Standard 14517

Summative assessment 3

Question 1

1.1

Diagram of Four Phases of Business Cycle

Four Phases of Business Cycle

Business Cycle (or Trade Cycle) is divided into the following four phases :-

1. Prosperity Phase : Expansion or Boom or Upswing of economy.

2. Recession Phase : from prosperity to recession (upper turning point).

3. Depression Phase : Contraction or Downswing of economy.

4. Recovery Phase : from depression to prosperity (lower turning Point)

1. Prosperity Phase

When there is an expansion of output, income, employment, prices and profits, there is also a rise in the standard of living. This period is termed as Prosperity phase.

Due to full employment of resources, the level of production is Maximum and there is a rise in GNP (Gross National Product). Due to a high level of economic activity, it causes a rise in prices and profits. There is an upswing in the economic activity and economy reaches its Peak. This is also called as a Boom Period.

2. Recession Phase

The turning point from prosperity to depression is termed as Recession Phase.

During a recession period, the economic activities slow down. When demand starts falling, the overproduction and future investment plans are also given up. There is a steady decline in the output, income, employment, prices and profits. The businessmen lose confidence and become pessimistic (Negative). It reduces investment. The banks and the people try to get greater liquidity, so credit also contracts. Expansion of business stops, stock market falls. Orders are cancelled and people start losing their jobs. The increase in unemployment causes a sharp decline in income and aggregate demand. Generally, recession lasts for a short period.

3. Depression Phase

When there is a continuous decrease of output, income, employment, prices and profits, there is a fall in the standard of living and depression sets in.

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