Bharti AXA Life Insurance Introduces Aajeevan Anand Plan

Recently, Private sector insurer – Bharti AXA Life Insurance launched Aajeevan Anand plan. It provides guaranteed regular payouts after every 5 years and life cover until the age of 100 years.

So, Aajeevan Anand Plan covers complete insurance of 100 years with guaranteed return after every 5 years.

An online news portal about business and economy - economictimes.indiatimes.com, quotes a statement of Bharti AXA Life Chief Marketing and Operations Officer (CMOO) - Mark Meehan, “Aajeevan Anand is a powerful financial solution that provides guaranteed regular payouts to meet various life stage needs until the age of 100.”

Aajeevan Anand of Bharti AXA Life Insurance is being recognized as a powerful financial solution also.

Further he said to the ET, “In addition to these lifelong paybacks, the product provides customers with life cover and hence is an ideal savings cum protection plan.”

So, with Aajeevan Anand plan customers can get life cover with saving-cum protection. It is a very unique insurance plan for the customers.

Mark Meehan adds, “This whole life plan is apt for salaried people since all premium payments are made in the first 10-15 years of the policy.”

It is just like a whole life plan. You can get advantages with the plan like a salaried people. You can pay the premium of the policy in installments.

In the analysis of Aajeevan Anand of Bharti AXA Life, the news portal writes, “The nominee of the policy holder would get sum assured in case of death during the policy period which is 100 years.”

Aajeevan Anand of Bharti AXA Life gives a great advantage for nominee also. Nominee of the policy can get a great advantage with death cover during the policy period which is 100 years.

Aajeevan Anand of Bharti AXA Life is one of the best insurance plans like Market Shield plan of ING Life and Pramerica MF.

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ING Life India Launched ING Market Shield ULIP

Recently, ING Life India launched a new unique Unit Linked Insurance Product - ING Market Shield. It provides the customer the opportunity to participate in the equity market while protecting investments from its downside.

An online news portal about business and economy - economictimes.indiatimes.com, quoted a statement of Rahul Agarwal, Chief Distribution Officer, ING Life India, “The new ULIP, ING Market Shield comes with unique benefits, allowing customers to maximize their returns and have adequate protection.”

Further Agarwal said, “ING Market Shield is a one of its kind unit linked insurance product. It is designed such that our customers can benefit from market's upswaing due to high equality participation, but secures their investment from losses, when the market is volatile. The plan provides the customer a Guaranteed NAV throughout the term of the product and not just at maturity unlike most available products.”

In an analysis of ING Market Shield, the news portal says, “ING Market Shield also ensures highest equity exposure throughout the term of the policy, compared to other products, therefore its is expected to generate a higher return to customers.

For a premium paying term of 5 years the minimum payable is Rs 48,000 and for a premium paying term of 10 years or the entire policy term the minimum premium payable is Rs 36,000. The plan offers premium payment in the annual mode, and customers can choose their desired life cover ranging between 10 to 20 times the annual premiums.”

About the relation of stock market with ING Market Shield, the news portal writes, “This process ensure maximum exposure to the stock market, while minimizing the downside risk and assures the Guaranteed NAV at all times through the term of the policy including death, surrender, partial withdrawals as well as Maturity benefit.”

Overall, ING Market Shield is a good new ULIP plan like Classic ULIP Plan of Reliance Life.

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Pramerica Dynamic Fund Launched by Pramerica Mutual Fund

Recently, Pramerica MF introduced its open-ended dynamic asset - Pramerica Dynamic Fund. The Fund is launched using a proprietary tool - Pramerica Dynamic Asset Rebalancing Tool (Pramerica Dart).

Pramerica Dynamic Fund scheme will invest in debt and equity instruments. The allocation to equity and debt of Pramerica Dynamic Fund will be determined by Pramerica Dart.

An online news portal about business and economy - economictimes.indiatimes.com, writes about Pramerica Dynamic Fund of Pramerica MF, “The tool takes into account three key factors that influence the markets - fundamentals, volatility and liquidity and comes out with a score that tells how much of equity should be held in the portfolio. This can range from 100-30% in equity depending on market valuations. Fund managers will actively manage the portfolio within the limits prescribed by the model.”

Further the news portal writes about the investment and aim of the Fund, “The fund aims to achieve long-term capital appreciation by investing in an actively-managed diversified portfolio comprising equity and debt instruments.

The fund will invest 30-100% in equity and the fixed income exposure is capped at 70% of the assets. The fund benchmark comprises 50% of Nifty and 50% of Crisil MIP Index.”

So, the Fund investment sectors are very clear with its percentage. The Fund has targeted revenue sectors very wisely.

About the management of Pramerica Dynamic Fund, the news portal writes, “The fund will be managed by Ravi Gopalakrishnan and Mahendra Jajoo. There is no entry load. To curb traffic, there is an exit load of 1% if you decide to redeem before completing one year in the scheme after allotment of units. NFO closes on December 3, 2010 before it reopens on December 13, 2010.”

Now, it is clear that there is no entry load in Pramerica Dynamic Fund of Pramerica Mutual Fund. It is one of the best MF investment plans after Index Fund of Reliance Mutual Fund.

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Classic ULIP Plan Launched by Reliance Life

Recently, Reliance Life Insurance launched a unit-linked insurance plan - Classic ULIP Plan. The policy provides policyholders the benefits of regular savings with enhanced protection and market-linked returns.

Classic ULIP Plan would provide protection to policyholders in the age group of 7-65 years. An online news portal about business and economy - economictimes.indiatimes.com, quotes a statement of Reliance Life about Classic Ulip plan, “The unique proposition of Reliance Life Insurance Classic Plan is that it offers flexibility and triple benefit of savings, insurance and investment - all in one single plan.”

The news portal quotes a statement of Malay Ghosh who is Executive Director and President in Reliance Life, “The new Ulip offers multiple benefits and protection - from helping policyholders plan their finances wisely at different stages of life, to providing risk cover on loss of life.”

Further he added, “The flexibility offered to policyholders by the company allows liquidity through partial withdrawals after fifth policy anniversary, loan after the completion of second policy year and top-up option to increase regular savings.”

In the analysis, the news portal writes, “Under the Regular Option, the customers would have to pay Rs 20,000 annually -- which can also be paid in monthly, quarterly and half yearly options.

For the Single Premium option, customers will have to pay a minimum of Rs 50,000 only once at the inception during the 15-year policy tenure.”

So, the Classic Ulip plan of Reliance Life gives a flexibility of payment. There is an option of single premium also in this plan. Reliance Life Classic ULIP Plan comes with triple benefit of savings, insurance and investment - all in one single plan.

Classic Ulip plan of Reliance Life covers risk of life also and helping policyholders plan their finances wisely at different stages of life. It is another best investment plan after SIP Investments via NSE-MFSS Platform of UTI.

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SIP Investments via NSE-MFSS Platform to be launched by UTI

Recently, UTI Mutual Fund announced the launch of SIP investments (Systematic Investment Plans) through NSE's-the Mutual Fund Service System (MFSS) platform.

An online news portal about business and economy - economictimes.indiatimes.com, quotes a statement of the company, “UTI Mutual Fund was the first fund house to partner with the National Stock Exchange (NSE) for selling mutual fund schemes through the NSE-MFSS platform in the month of November 2009.

Keeping with that tradition of bringing the most convenient way of investment to our investors through cutting edge technology, we are the first fund house now to launch SIP investments (Systematic Investment Plans) through this NSE-MFSS platform.”

So, UTI Mutual Fund is bringing the most convenient way of investment. It offers cutting edge technology through the investment. It is launched through the NSE-MFSS platform.

Further the news portal writes about SIP Investments via NSE-MFSS Platform of UTI, “Terminals of NSE brokers will be the official point of acceptance and hence the date of acceptance of the transaction will be the date of entering the request on the terminal.

Investors will also have the added advantage of obtaining the same day's NAV (before 3 p.m.) at a large number of outlets in more than 1500 towns and cities, including remote locations.

The investors will also have an advantage of getting their units allotted in demat mode in addition to the existing physical mode as per their choice.”

Finally, UTI Mutual Fund gives an advantage to the investors by introducing SIP Investments via NSE-MFSS Platform. It will allocate to the existing physical mode as per their choice. The investment plan is very appreciating and unique inspired by cutting edge technology in the recent time. The fund can be compared with Index Fund of Reliance Mutual Fund. It fulfills all the needs of the new age.

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4 New Products Launched by DLF Pramerica Life

Recently, DLF Pramerica Life, a private sector insurer launched 4 new insurance products including two traditional plan.

DLF Pramerica Life Insurance said in a statement, “The traditional non-linked products namely DLF Pramerica Assure Money Plus and DLF Pramerica Tatkaal Suraksha Gold provides saving as well as protection.”

DLF Pramerica Assure Money Plus and DLF Pramerica Tatkaal Suraksha Gold are non-linked products of DLF Pramerica Life.

Further it said, “Assure Money Plus provides minimum guaranteed earnings on maturity along with the advantage of high life insurance cover.

Besides, it also launched two unit linked products namely DLF Pramerica Wealth Plus Premier and DLF Pramerica Ezee Wealth Plus with simplified underwriting.

DLF Pramerica Wealth Plus Premier is a good product for high net worth individuals seeking potentially high investment returns along with a well secured future for the family in case of any eventuality.” The statement was published in ET.

Assure Money Plus offers guaranteed earnings on maturity. It gives an advantage of high life insurance cover also.

On the other hand, DLF Pramerica Wealth Plus Premier and DLF Pramerica Ezee Wealth Plus are launched with the simplified underwriting. DLF Pramerica Wealth Plus Premier is considered as a very good product that offers high investment returns along with a well secured future for the family in case of any eventuality.

An online news portal - economictimes.indiatimes.com, writes about new products of DLF Pramerica Life and DLF, “DLF Pramerica Life is a joint venture between real estate company DLF Ltd and the US-based Prudential International Insurance Holdings.

The company became operational in September, 2008 and currently has 30 offices across Delhi NCR, Haryana, Punjab and Gujarat.”

We all know that DLF Pramerica Life is a joint venture between real estate company - company DLF Ltd and the US-based Prudential International Insurance Holdings. Currently, it has more than 30 offices across well known cities in India.

DLF Pramerica Life launches some good products after Index Fund of Reliance Mutual Fund.

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Index Fund Launched by Reliance Mutual Fund

Recently, Reliance Mutual Fund which is a leading asset management firm launched an open-ended index fund. It will invest in companies whose securities are covered in the Nifty and the Sensex.

Reliance Mutual Fund said in a statement about Index Fund, “The scheme proposes to invest 95-100 per cent in equities and equity-related securities covered by the Nifty and the Sensex.” It was published in the ET.

The scheme gives a chance to invest almost 100% in equities and equity-related securities. It is covered by the Nifty and the Sensex.

About the Index Fund of Reliance Mutual Fund, economictimes.indiatimes.com writes, “Available in both growth and dividend option, the minimum investment amount is Rs 5,000. Adding, entry load is nil for the scheme, whereas the exit load is 1 per cent for holding period of up to 12 months and Nil thereafter.” It is the quotation of a statement. So, the scheme is available in both growth and dividend option.

Sundeep Sikka who is the Reliance Capital Asset Management CEO said about Reliance Index Fund, “Reliance Index Fund provides investors an opportunity to participate in India's growth story by investing in well-diversified portfolio of fundamentally strong, highly liquid and well-known companies.”

So, it gives investors a chance to participate in India’s growth story by investing in well-diversified portfolio.

Further he adds, “We have decided not to charge any asset management fees for this fund in our effort towards financial inclusion and to make this product more attractive for our investors - especially in smaller cities or first time investors who have not participated in the success of capital markets in India.”

Index Fund of Reliance Mutual Fund closes on 23rd September, 2010. It is a very attractive product for the investors in Reliance Mutual Fund. Investors will get a chance to participate in the success of capital markets in India.

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SBI Life Launches Smart Performer and Unit Plus Super

Recently, Private insurer SBI Life launched two Unit-Linked Life Insurance Policies (ULIPs) - Smart Performer and Unit Plus Super. These ULIPs plans are compatible with the new IRDA guidelines that are already effective.

About the two new ULIPs, SBI Life said in a press release, “SBI Life has launched Smart Performer and Unit Plus Super... In compliance with the new IRDA guidelines, these newly launched ULIPs are equipped with enhanced features such as benefits of higher protection, multiple investment options and a wide range of riders.”

So, the two new ULIPs - Smart Performer and Unit Plus Super are well-matched with the new IRDA guidelines also. These are equipped with enhanced features also such as benefits of higher protection, multiple investment options and a wide range of riders.

Further MD & CEO M N Rao of SBI Life Insurance said, “Customers will find that the new range is highly beneficial, as it further reinforces the proposition of security and long-term wealth creation.”

As per the statement of MD and CEO of SBI Life, these plans are highly beneficial in long-term wealth creation and proposition of security.

About 2 new ULIPs of SBI Life, an online news portal about business and economy - economictimes.indiatimes.com writes, “SBI Life Insurance is a joint venture between State Bank of India and BNP Paribas Assurance. SBI has a 74 per cent stake in the insurance company, while BNP Paribas Assurance holds the remaining 26 per cent.”

Further the news portal adds, “The Insurance Regulatory and Development Authority's (IRDA) new guidelines protecting ULIP-holders from mis-selling by dealers and onerous commissions are likely to make the equity-linked instruments more investor-friendly.”

In the current situation, Smart Performer and Unit Plus Super of SBI Life are the best plans for the customers. These follow the rules and regulations of new guidelines of IRDA also.

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Reliance Capital Asset Management Plans to Launch Islamic Funds in Malaysia

Recently, a subsidiary of Reliance Capital Asset Management has announced to launch two Islamic funds in Malaysia by July. It will roll out products for retail investors in two years.

About the Reliance Capital Islamic Funds, economictimes.indiatimes.com writes, “Reliance, India's largest asset management company, will launch a fund investing in Indian stocks next week and a quantitative global equity fund investing in the US, Europe and Asia in July. Both funds would be managed out of Malaysia.”

Vikrant Gugnani who is the Reliance Capital's international businesses CEO said to ET, “The long-term objective is to target the retail sharia market in the region. We believe the retail story in Malaysia has yet to unfold and we want to be positioned well before to take advantage of (it).”

Reliance Capital Asset Management is the part of financial services firm Reliance Capital. It manages more than $33 billion of Reliance Capital.

About the new funds of Reliance Capital, online.wsj.com writes, “The Malaysian unit of Reliance Capital Asset Management, India's largest asset management firm, plans to launch its two maiden Shariah-compliant funds as it seeks to tap into Malaysia's importance as a Shariah-compliant financial hub and the growing demand for Islamic funds from the region.”

The news portal quotes a statement of Vikrant Gugnani who is the Reliance Capital's international business chief executive, “We are targeting institutional investors for these funds but eventually we will broaden our reach to include the retail market. Our Malaysian company will be the flagship venture in the Islamic asset management business and a global hub for Shariah-complaint products. The total net asset value of Islamic funds in Malaysia currently exceeds MYR22 billion.”

According to the Ian Lancaster who is the Reliance Asset Management Malaysia's chief executive, “The Global Equity fund is a 24-country developed market fund that will invest across 2,500 stocks.”

Islamic Funds in Malaysia by Reliance Capital has gotten the biggest buzz after ICICI Prudential Nifty Junior Index Fund. Now, Reliance is the global leader in market funds.

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ICICI Prudential Nifty Junior Index Fund Launched

Recently, ICICI Prudential AMC announced the launch of Nifty Junior Index Fund. It is an open-ended index fund that allows users to invest in companies whose securities are included in Nifty Junior Index.

The New Fund Offer opens from June 10. It will end on June 21. It is declared in a statement by the company.

The fund is being considered as the country's first open-ended index fund to track CNX Nifty Junior.

About the ICICI Prudential Nifty Junior Index Fund economictimes.indiatimes.com, an online news portal about news and economy says, “Mutual fund major, ICICI Prudential AMC launched its ICICI Prudential Nifty Junior Index Fund, an open-ended index fund that will invest in companies whose securities are included in Nifty Junior Index.”

So, it is an open-ended index fund. You are able to invest in companies whose securities are included in Nifty Junior Index.

Further the news portal quotes a statement of the company about the ICICI Prudential Nifty Junior Index Fund, “Its New Fund Offer (NFO) opens from June 10 and will close on June 21.”

The news portal says, “The Company claimed it to be the country's first open-ended index fund to track CNX Nifty Junior. The fund aims to track 90-95 per cent of the index, maintaining cash balance between 5-10 per cent of the net assets to meet redemptions and other liquidity requirements.”

The news portal gives a conclusion about the fund, “The fund will also track upto 100 per cent of the index as and when the liquidity in the index improves.”

Overall, the new fund - ICICI Prudential Nifty Junior Index Fund has introduced a great investment plan for the consumers. It has great flexibility and it aims to track 90-95 % of the index. There is no doubt that it is a new fund. The new fund has been launched by ICICI Prudential as Nifty Junior Index Fund. The fund will be able to release business cycle.

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Monetary Policy in Depression and in Inflation from Business Cycle

Monetary Policy in Depression:

In the atmosphere of depression, there is a need to encourage investment and so the loans are made cheaper to stimulate investment and increase the demand by increasing income and employment because a cheap money policy will discourage saving and promote investment.

It is said that the Monetary Policy has less scope in depression and fails to bring the economy out of depression, as the MEC is low and so the businessmen are scared to invest, even though the rate of interest is low. Rate of interest is the factor but not the only factor for investment.

Businessmen borrow when the business is expanding not when it is declining. However, we cannot say it is totally useless because it can stimulate demand for durable goods and private investment. But open market operation can increase the liquidity overall in the economy. Even if credit policy cannot turn the business cycle, it can create the necessary atmosphere for the other policies to be successful.

Monetary Policy in Inflation:

Inflation is faced at the prosperity phase when MEC is high, rising prices, output and employment. The condition in the economy is very optimistic and business activities are rapidly increasing. Though his condition cannot go on continuously, with the increase in consumer spending and investment spending, the credit condition in the economy becomes tight.

The banks start feeling difficult to cope with demand for credit. In such a situation, the rate of interest is raised by the banks to control the liquidity in the economy. The cash Reserve Ratio, Statutory Liquidity Ratio are raised and a tight money policy is in effect to control the boom from turning into inflation. The effect of Monetary Policy in inflation is much greater than in depression.

Now, we will try to understand how fiscal policy controls the business cycle in the next chapter of the blog.

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Multiplier-Acceleration Interaction Principle of Business Cycle

Samuelson’s model is regarded as the first step in the direction of integrating theory of Multiplier and the principle of Acceleration. His model shows how the multiplier and acceleration interact with each other to generate income, to increase consumption and investment, demand more than expected and how this causes economic fluctuations.

To understand Samuelson’s model, let us first understand derived investment. Derived demand is the investment in capital equipment, which is undertaken due to increase in consumption making new investment necessary. We will try to understand this interaction briefly. When autonomous investment takes place in a society, income of the people rises and the process of Multiplier start increasing the income, which leads to the increase in demand for consumer goods depending on the marginal propensity to consume.

If there is excess production capacity, the existing stock of capital would prove inadequate to produce consumer goods to meet the rising demand. Producers trying to meet the growing demand undertake new investments. Thus, increase in consumption creates demand for investment. This is derived investment.

This marks the beginning of Acceleration process, when derived investment takes place income increases further, in the same manner as it happens when the autonomous investment takes place. With increase in income, demand for consumer goods rises. This is how the Multiplier and the Accelerator interact with each other and make the income grow at a rate much faster than expected. With the help of both the Multiplier and Acceleration principle, Samuelson tried to relate the upswings and downswings of business cycle. There are some criticisms regarding the assumptions, they are as follows –

There is no government activity and no foreign trade

No excess capacity

One year lag in increase in consumption and investment demand

Though many economists had different approaches, some attribute business cycle to expansion and contraction of money supply some say it is due to the interaction of Multiplier & Acceleration which changes the aggregate demand and leads to fluctuations but some attribute it to the innovations in one sector which spreads to the rest of the economy that causes recession and boom.

There are other economists, who attribute fluctuation of business cycle to the politicians manipulating economic policies and some say supply shocks for e.g., 1970’s sharp increase in oil prices, increased inflation. All these theories have elements of truth. But they are not valid in all the places and time. The key is to understand them and combine these theories and use the knowledge of macro economics to decide when and where to apply it.

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Pure Monetary Theory of Business Cycle from Managerial Economics

According to Prof. R. G. Hawtrey, a British economist, there is direct relationship between volume of money supply and the economic activity. Wherever there is change in the flow of money or money supply changes, there will be business fluctuations. Here, he means the credit creation by the banking system i.e., expansion in bank credit leads to demand and so the upswing of business cycle starts. On the other hand, when there is decrease in money supply through contraction of bank credit, it leads to down swing and thus leads to depression.

Expansion of bank credit happens when interest rates are reduced, which means, the loans are cheaper. Due to liberal loans, the profit margins change as they are very sensitive to the change in interest rate.

Thus, investment increases and so the employment, which in turn increase the income and demand. This increase in demand leads to increase in price and profit margins. Therefore, the upward trends start i.e., the upswing starts. But as each phase has the germs of other phase, the turning point starts. When bank changes its policy of credit expansion, the cash reserve with the bank reduces.

The leading rates are increased to discourage the demand for fresh loans and they start calling to return loans. The producers start disposing off their stock to repay loans. The restricted policy on credit and high rate of interest discourages a new investment, which leads to downswing. The income falls and cash starts coming back to the bank. But as the cash reserve with the bank improves, again the bank starts using liberal attitude towards credit creation and so the revival starts. This takes the economy to expansion or prosperity. According to R G Hawtrey flow of money supply is the sole cause for business fluctuations. This theory was not unchallenged. Some limitations are –

Business cycle is a very complex phenomenon and we cannot attribute it completely to credit creation by banking system.

Bank plays an important role in the financing of business but it cannot be the only reason for business crisis. It can just aggravate the situation.

Too much of importance is given to bank credit. Many times traders don’t borrow from bank but plough back their profit.

Investment not only depends on interest rates but on the rate of return also. Hawtrey has totally ignored MEC.

This theory has totally ignored the non monetary factors like innovation, climatic conditions, psychological factors etc.

This theory also has been taken from business cycle chapter of Managerial Economics SMU MBA MB0026 book in the continuation of Over-Investment theory and Schumpeter theory.

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Over-Investment Theory of Business Cycle from Managerial Economics

A.F. Hayek assumes economy in equilibrium. Whenever this equilibrium is disturbed then there is expansion or contraction. This theory says that when the economy is in equilibrium, the rate of interest is such that Saving = Investment there is no unemployed resources.

Suppose the bank credit expansion takes place, then the equilibrium rate of interest is disturbed. This low market rate of interest will tempt the businessmen to borrow more and invest in new ventures. This leads to upswing in business cycle; as a result employment, output, profit and demand increases.

But then this phase does not continue indefinitely. Due to scarcity of resources, this expansion phase cannot go on and on. But due to increase in price, the people are forced to decrease consumption and start saving more. This forced saving due to high price makes the bank ease credit and investment starts.

The economy comes out of its downswing as income increases and people revert to earlier consumption and expenditure levels. This helps economy to recover and the upswing starts again. This theory says that the over investment due to forced saving by people in inflation is the cause of fluctuations in economic activities. Hayek says, voluntary saving leads to change in structure of production permanently but forced saving brings changes which are not permanent.

The limitations for this theory are –

Assumption of full employment is unrealistic.

Undue importance is given to bank’s rate of interest. Even if the rates of interest are constant, there will be variation in production when the business stars getting profits.

We already have discussed about Schumpeter theory of business cycle. This theory was also not complete just like Over-Investment theory of business cycle. A.F. Hayek assumes about the Over-Investment theory of business cycle. He sees only one aspect just like Joseph Schumpeter. There are also many disabilities in Hayek’s Over-Investment theory.

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Schumpeter Theory of Business Cycle in Managerial Economics

Joseph Schumpeter has explained the expansion and contraction through industrial innovation. Innovation is an actual application invention; whereas invention is discovery of something new.

Invention converts into innovation. In this theory, the innovation can be introduction of new product, market source of raw material, opening of new market in business. An entrepreneur is an innovator, he has the knowledge to do something new, daring and foresight to go ahead of others and in this process he demands funds from banking system. Now, we will examine how innovation causes business fluctuations. In this theory, Schumpeter says, any innovation causes business fluctuations. In this theory, Schumpeter says, any innovation can move the economy to disequilibrium from equilibrium and this will continue till the new equilibrium position is reached. Let us say the innovation is the introduction of a new product in a full employment economy.

The new industry has to reward heavily the existing factors of production to attract them. The new industry is financed by bank credit. As the factors of new industry get higher rewards, their purchasing power increases and the demand of old industry product increases, as the new product is yet to come in the market.

Therefore the demand and production of old products increases. The old industry will now take credit from bank for expansion. In the mean while, the new product comes to the market. Due to novelty, there is decrease in the demand for old products. The old industry starts cutting down on production, therefore the income to factors of production decreases. As a result, the demand for old and new product decreases. Due to more and more joblessness the vicious circle of deflation starts and the economy gets into down swing. So, this theory says that the economic fluctuations are due to innovation in the industry.

This theory was challenged and limitations are –

The full employment assumption is unrealistic.

Bank is not the only source of finance for every innovation in business.

Many times the profits are ploughed back to finance innovations.

Innovation cannot be the sole cause of business cycle.

The chapter has been introduced in the continuation of phase of business cycle.

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Phases of Business Cycle in Business and Financial Market

After understanding what are business cycle and their characteristics, we will take each phase of business cycle in detail.

Prosperity or Expansion:

This phase of business cycle is called the upswing. This phase is in the upper half of the cycle. To start with, we will try to see how this phase begins. It starts from equilibrium position. When the demand increases, the demand of raw material also increases and so the employment which again leads to increase in employment in other industry. As the consumption increases, general employment also increases. The wages, salaries, interest rates, taxes and the cost do not increase in the same proportion and consequently profit margins go up. There is a general feeling of optimism, and the production capacity of the economy is fully utilized. The rise in general price is marked in this phase.

In this phase, investment activity increases due to increase in demand for consumption goods. This optimistic sentiment can be seen in real estate and share market boom. Manufacturers pile up stock with improved prospects of increase in demand. This activity of producers’ increase in production is faster than consumption. But this process cannot be indefinitely continued. This phase ends and turns into phase of recession. The factors for recession to start are, when the gap between cost and price starts rising and the profit margin declines. This happens because of scarcity felt in different factor market and therefore the price of factors of production rises.

Recession:

This is a turning period, which is relatively shorter. But in this phase the production of consumer goods do not decline immediately. The demand for consumer goods fall with lag but the fall in demand for capital goods falls drastically. Producers cancel their future investment programmers so the demand for machinery decreases and therefore the capital goods manufacturing sectors respond more quickly. In this period over optimism gives way to over pessimism. All the investment seems unprofitable and so there is collapse in Marginal Efficiency of Capital. The employment situation gets bad as investment activity declines. This is referred as mild recession but when recession is severe it is called crisis.

Depression or Contraction:

This phase is a phase of low economic activity. There is a fall in production and employment throughout the economy. But it is not uniform in all sectors. The fall in demand for consumer goods is less than the fall in demand for machines and equipment. During depression, the expenditure on durable goods fall more than consumer goods. Therefore, the production and employment is affected in the sectors producing durable goods. Agriculture sectors are not much affected, as it is necessary for subsistence. The producers and wholesalers start liquidating their inventories piling up during prosperity phase. This phase shows low economic activity with fall in production, fall in employment and fall in general price level and the profit margins also. Producers are not interested to venture fresh investment as the MEC totally collapses.

The price structure is distorted as for some goods, price falls a little; whereas for some goods, the price vertically collapses making the income distribution worst and this prolongs the phase of depression. On the other hand, not all the costs fall at an equal rate; as wages and salaries tend to be sticky during this period due to trade unions about labour laws. Rents, interest rates and taxes come down slowly, while price falls down continuously and cost rigidity washes away the profit margins for producer. Turning point of depression is ‘trough,’ which is a very short period but sometimes it is for 3-5 years. For e.g. the Great depression of 1930s. After this, the recovery phase starts.

Recovery:

This phase is gradual. It starts when the price stops falling. This is said to start when the piled up stock is exhausted. Now, the producers start planning for production. This generates employment and income, which again leads to demand for consumer goods. The MEC starts improving. This leads to correction of price and so also to the relationship between cost and price. The profit starts replacing looses and recovery gathers momentum. Rising price encourages companies towards new investment and projects. This phase of recovery takes the economy to the phase of prosperity. Thus, the cycle is again ready to repeat itself.

Now we know what a business cycle and the phases of business cycle. In the next section, we will try to understand the theories of business cycle. They will explain you the causes of business cycle.

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Business Cycle and Characteristics of Business Cycle

Business cycle is also called Trade Cycle. The business is never steady. There are always ups and downs in economic activity. This cyclical movement both upwards and downwards is commonly called Trade Cycle. This is a wave like movement in regular manner in business cycle. In business, there are flourishing activities, which take economy to prosperity and growth whereas there are periods when there is recession, which leads to decline in the employment, income and output. When the economy goes into downswing then there is a stage of recovery to reach a new boom.

Definition and characteristics of business cycle:

Definition:

According to Keynes, “Trade Cycle is composed of periods of good trade characterized by rising price and low unemployment percentage altering with periods of bad trade characterized by falling price and high unemployment percentage.” In the simple words – Business Cycle is a fluctuation of the economy characterized by periods of prosperity followed by periods of depression.

Characteristics of Business Cycle:

The fluctuations are wave like movement and are recurrent in nature.

Business Cycle is characterized by waves of expansion and contraction. But these are not only two phases of business cycle. There are four phase of business cycle – Expansion, Recession, Contraction and Revival or Recovery.

The movement from peak to trough and again though to peak is not symmetrical. According to Keynes, prosperity phase of business cycle comes to end fast but dip is gradual and slow.

Business Cycle is self generating. Every phase has germs of the next phase, that is, expansion has the germs of the recession in it.

In this chapter we learnt about business cycle and its characters and definition. However, we already have studied about marginal efficiency of capital and investment in business by this blog. Business cycles are everything which determines your business objectives.

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Marginal Efficiency of Capital and Investment in Business

Marginal efficiency of capital and rate of interest are the main factors which affect investment. Demand analysis is the basic aspect of investment.

Marginal Efficiency of Capital (MEC) – Any investment decision depends not only on rate of interest but also whether or not the expected rate of returns on the investment is greater than cost of borrowing the funds. In these two factors, the MEC is an important factor because MEC is the expected rate of returns from the investment. If the returns expected are low, then the investment is not profitable because in short run, rate of interest is stable. In MEC, capital means the real productive assets. MEC depends on expected rate of returns of a capital asset over its life time which is also called Prospective Yield and the supply price of capital assets. Any business man will weigh the prospective yield with the supply price before investing.

Investment and rate of interest: Rate of interest is considered the most important factor in investment will be low and vice-versa. This was a view given by classical economists. They considered rate of interest as the only factor determining investment.

MEC, Rate of Interest and Investment Decisions:

The businessmen will decide whether to purchase on the marginal unit of capital by comparing the prevailing rate of interest with the MEC.

If MEC Rate of interest, this additional investment will get profit and investment is profitable.

MEC Affecting MEC:

There are some short term and some long term factors.

Short term – Under these factors are:

Expected Demand for Future

Level of Income

When Consumption Changes

Business Expectation

Long Term Factors:

Population Growth

Economic Policies of Government

Infrastructures facilities

Limitation of MEC:

Investment done by the Government for social purpose has no connection with the MEC.

Practically it is difficult to estimate MEC.

Whenever there is contractionary monetary policy, the firms may not find funds even if the projects or investments are profitable

Every time the businessmen do not necessarily go for loans. Sufficient funds are gathered by the businessmen for some projects, which are planned for a long time.

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Consumption Function and Law of Consumption from Managerial Economics

Consumption function is the basic theories given in Macro economics. We already have discussed about the theory of consumers surplus and analysis of market structure. Now, we will raise a debate on consumption function and law of consumption. The theory is taken from Managerial Economics book of SMU. It is MB0026 book code of Sikkim Manipal University for MBA.

Psychological Law of Consumption:

Consumption means using goods and services for satisfying current wants. We spend major portion of our income on consumption. Consumption expenditure means house hold spending, which satisfies our immediate wants. Under this section, we will study the relationship between consumption and income. The pattern of consumption expenditure for all families is more or less the same. We can see that families have tendencies to increase consumption with increase in income. This relationship between consumption and income is called consumption function. Consumption is a function of income.

C = f(Y)

C – Consumption

f – Function

Y- Income



C = a+bY

C – Consumption

A – The level of consumption which will exist when the income is 0

bY – Consumption income ratio or APC

MPC

Marginal Propensity to Consume is the ratio of change in total consumption to change in total income.

It says that when income increases, the consumption will increase, but less than the increase in income. This is called the Psychological law of consumption. People do not consume all the increase in income in the current period, because they have to save for their future. This consumption behavior of a family helps us to understand community behavior. J. M. Keynes introduced the concept of consumption function at macro level as aggregate consumption function. The theory of consumption and law of consumption will help you in the analysis of business and market. It is the analysis of the managerial economics.

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