BUSINESS CYCLES
At the end of this Chapter, you should be able to:
1. Explain the Meaning of Business Cycles.
2. Describe the Different Phases of Business Cycles.
3. Explain the Features of Business Cycles.
4. Explain the General Causes behind these Cycles.
5. Elucidate the relevance of Business Cycles in Business Decision Making.
SUMMARY
1. The rhythmic fluctuations in aggregate economic activity that an economy experiences over a period of time are called business cycles or trade cycles and are manifested in fluctuations in measures of aggregate economic activity such as gross national product, employment and income.
2. A typical business cycle has four distinct phases namely,
- Expansion (also called boom or upswing) characterized by increase in national output and all other economic variables.
- Peak of boom or prosperity refers to the top or the highest point of the business cycle.
- Contraction (also called downs-wing or recession) when there is fall in the levels of investment, employment.
- Trough or depression occurs when the process of recession is complete and there is severe contraction in the economic activities.
3. Economists use changes in a variety of activities to measure the business cycle and to predict where the economy is headed towards. These are called indicators.
4. A leading indicator is a measurable economic factor that changes before the economy starts to follow a particular pattern or trend. i.e. they change before the real output changes.
5. Variables that change after real output changes are called ‘Lagging indicators’.
6. Coincident economic indicators, also called concurrent indicators, coincide or occur simultaneously with the business-cycle movements.
7. According to Keynes, fluctuations in economic activities are due to fluctuations in aggregate effective demand.
8. According to some economists, fluctuations in investments are the prime cause of business cycles. Investment spending is considered to be the most volatile component of the aggregate demand.
9. Fluctuations in government spending with its impact on aggregate economic activity result in business fluctuations.
10. Macroeconomic policies, (monetary and fiscal policies) also cause business cycles.
11. According to Hawtrey, trade cycle is a purely monetary phenomenon. Unplanned changes in the supply of money may cause business fluctuation in an economy.
12. According to Pigou, modern business activities are based on the anticipations of business community and are affected by waves of optimism or pessimism.
13. According to Schumpeter, trade cycles occur as a result of innovations which take place in the system from time to time.
14. Understanding what phase of the business cycle an economy is in and what implications the current economic conditions have for their current and future business activity, helps businesses to better anticipate the market and to respond with greater alertness.
