Business Cycles
The business cycle is an alternate expansion and contraction in
overall business activity, as evidenced by fluctuations in aggregate economic
activity such as GNP, industrial production, employment and income.
According to J.M.Keynes “A trade cycle is composed of periods of
good trade characterized by rising prices and low unemployment percentages,
alternating with periods of bad trade characterized by fall in prices and high
unemployment percentages.”
Phases
of a Business Cycle: A business cycle will have 5 different phases or stages.
They are
1. Depression
2. Recovery
3. Expansion or full employment
4. Boom or overfull employment
5. Recession
(1) Depression: During this period business activity in the
country will be much below normal level. It is characterized by a short fall in
production, mass unemployment, fall in prices, low wages, contraction of
credit, a high rate of business failures and an atmosphere of all round
pessimism.
(2) Recovery: During this period business activity increases. The
industrial production and volume of employment steadily increases. The prices
and wages increases. The recovery may take place due to the following reasons:
•New government expenditure
•Exploitation of new sources of energy
•Innovations
•Investment in new areas
•Changes in the techniques of production
(3) Expansion: This stage is characterized by high capital
investment in basic industries, expansion of bank credit, high prices, high
profits, high rate of formation of new business enterprises and the full
employment.
(4) Boom: It is the stage
of rapid expansion in business activity resulting in high stocks and commodity
prices, high profits and over-full employment. A situation develops in which
the no. of jobs exceeds the no. of workers in the market. Such a situation is known
as over-full employment. Profits will further increase. This will lead to more
investment and in turn further rise in price level and inflation.
(5) Recession: In this stage more business enterprises fail,
prices collapse and confidence is shaken. Building construction slows down and
unemployment increases. There is fall in income during recession.
a.
Business
cycle is a wave like movement.
b.
The
cyclical fluctuations are recurrent in nature.
c.
The
upward or downward swing of the business cycle is self reinforcing.
d.
Business
cycle contains self generating forces.
e.
They
are all pervasive in their effects.
f.
The
peak and the trough of business cycles are not symmetrical.
g.
In
cyclical fluctuations the prices and the production generally rise or fall
together.
h.
The
cyclical upward and downward swings move parallel with production and monetary
demand.
i.
The
cyclical fluctuations are felt more in capital goods industries than in
consumer goods industries.
j.
They
are not periodical in nature.
k.
Prices
of manufactured goods are comparatively rigid while that of agricultural goods
are normally flexible.
l.
The
cyclical fluctuation tends to be not only national but also international in character.