Business Cycles – Concept and Features

Business Cycle –

It is a natural phenomenon of expansion and contraction in the production levels over a period, It is natural and happens with every business and every economy. OR

The Business Cycle refers to the ups and downs in the economic activities that the economy experiences over a period. Business cycles are also called trade cycles. OR

The period of high income, high output, high employment is called the period of expansion, upswing or prosperity and the period of low income, low output, low employment is called the period of contraction, recession, downswing or depression. These alternating periods of expansion and contraction in economic activity are called business cycles.

According to Wesley Clair Mitchell ‘Business Cycles are a type of fluctuation found in the aggregate economic activity of nations that recognize their work mainly in business enterprises. A cycle consists of expansion occurring at about the same time in many economic activities followed by similarly general recessions, contractions and revivals which merge with expansion phase of next cycle, this sequence of change is recurrent, but not periodic.’

According to J.M. Keynes ‘ A trade cycle is composed of periods of good trade characterized by rising prices and low unemployment percentages with periods of bad trade characterized by falling prices and high unemployment percentages.’

During a period of recession many workers lose their jobs and as a result large scale unemployment comes to prevail in the economy.

Depression causes businesses to go bankrupt, it lowers the the level of living of the people, it creates the uncertainty in the economy which causes anxiety to the individuals about their future income and employment, and involves a great risk for long term investment which results in an big decline in investment in the economy.

On the other hand during the period of boom, Inflation erodes the real income of the people and makes life miserable off the poor people.

Inflation distorts the allocation of resources by drawing away scarce resources from productive use. When inflation rates are high, it impedes economic growth.

Features of Business Cycle –

1. Business cycles occur periodically. They don’t have same regularity, they have different phases such as expansion, peak, contraction, trough. The duration of the cycles varies from two to ten or twelve years.

In the words of Samuelson ‘No two business cycles are quite the same. Yet they have much in common. Through not identical twins, they are recognizable as belongs to the same family.’

2. Business cycles are synchronic, they cause changes to all the industries and sectors in all the countries in a globally interconnected world. For example – depression or contraction occurs simultaneously in all industries or sectors of the economy. Recession passes from one industry to another and creates a chain reaction until the whole economy is in the grip of recession.

3. An important feature of the business cycles is that investment and consumption of durable consumer goods such as cars, houses are affected most by the cyclical fluctuations.

4. An another important feature of business cycles is that consumption of non durable goods and services does not vary much during these fluctuations.

5. The immediate impact of depression and expansion is on the inventories of goods. When depression sets in, inventories start accumulating. This leads to cut in production of goods. On the other hand, when recovery starts, inventories goes down than the required level. This causes increase in production and investment in capital goods.

6. An another important feature of business cycles is that profits fluctuates more than any other type of income. Business cycles causes a lot of uncertainty for businessmen and makes it difficult to forecast the economic conditions. During the depression period profits may even become negative and many businesses go bankrupt. While in times of boom or recovery they may even receive abnormal profits.

In free market economy profits are justified on the grounds that they are necessary payments if the entrepreneurs are to be induced to bear uncertainty.

7. Business cycles are international or global in character. Once started in one country they spread to other countries through the trade relations between them.

8. Every Business Cycle has four different phases – Depression, Revival, Boom and Recession.

9. Not every industry is affected equally, some are affected badly whereas others don’t seem to be affected seriously.

10. Socialist economies are very less likely to be affected by the business cycles than the capitalist economies.