Business Cycle

Business cycle can be defined as the periodic fluctuations measured in terms of prices, GDP, levels of employment and production in the general rate of economic actions. Irregularity and unpredictability are the two major characteristics ofbusiness 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.

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.

The following are the four phases of business cycle:

Contraction refers to a reduction in the pace with which economic activity is conducted. If this contraction is very severe, it is known as recession. The turning point in the cycle of business where a contraction changes into expansion is known as trough. If the trough is a deep one, it is referred to as depression. Expansion refers to an increase in the speed of economic activities. The upper turning point of business cycle is known as a peak. Profit and sales are maximum at the time of expansion. Businesses can not logically hold on to this crescendo and a process of general slowing down results in contraction.

In the long run, various economic activities tend to waver. These fluctuations are referred to as economic cycle orbusiness cycle. Within this cycle, there are periods of decline in stagnation of output and there are periods of rapid increase in output. Real Gross Domestic Product or GDP is used to measure these fluctuations.

The following are the types of business cycles:
The Kondratieff wave or cycle
The Kuznets infrastructural investment cycle
The Juglar fixed investment cycle
The Kitchin inventory cycle
The political business cycle
The partisan business cycle

Over the past few years, economic theories have laid greater stress on economic fluctuations rather than onbusiness cycles. According to the theory of rational expectations, an economy does strive to be in a state as close to equilibrium as possible. The theory of business cycle has been more relevant in microeconomics. This theory helps in risk management, investment timing, and elimination of exponential growth by using anticipated business cycle as a baseline.

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Last Updated on : 29th July 2013

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