ABM-Module: A- BUSINESS CYCLES

Business cycle or economic cycle

The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables. In other words, a business cycle or an economic cycle refers to economy-wide fluctuations in economic activity (including production of goods and services), over several months or years. Such cycle pass through phases of prosperity and depression. A business cycle is not predictable, regular or repetitive. Its timing is random and unpredictable. The business cycles influence the business decisions and lead to impact on individual firms and the economy as a whole. Characteristics of a business cycle: It is synchronic: The upward or downward movement tend to occur almost at the same time, in all industries. Prosperity or depression in one industry will have impact in other industries, almost immediately. It shows a wave-like movement: The period of boom and depression comes alternatively. Cyclical fluctuations are recurring in nature: Various phases are repeated. A boom is followed by depression which is followed by prosperity again.

Downward movements are more sudden, than the upward movements There is no indefinite depression or boom period. Phases of a business cycle A business cycle has 4 phases namely (i) Boom (2) Recession (3) Depression (4) recovery

                             Business Cycle or Trade Cycle

1.              The term business cycle (or economic cycle) refers to economy-wide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long-term growth trend, and typically 'involve shifts over time between periods of relatively rapid economic growth (expansion or boom), and periods of relative stagnation or decline (contraction or recession).

2.              Business cycle simply means the whole course of business activity which passes through the phases of prosperity and depression. A business cycle is not a Tegular, predictable, or repetitive phenomenon like the swing of the pendulum of a clock. lts timing is random and, to a large degree, unpredictable.

3.              The business cycles influence business decisions. The cycles affect not only the economy in general, but each individual business firm.

Characteristics of a Business Cycle:

1.              A business cycle is synchronic. The upward and downward movements tend to occur at almost the same period in all industries. The wave of prosperity or depression in one industry will soon generate a wave in other industries.

2.              A business cycle shows a wave-like movement. The period of prosperity and depression can be alternatively seen in a cycle.

3.              Cyclical fluctuations are recurring in nature. The various phases are repeated. A boom Is followed by depression and the depression again is followed by boom.

4.              There can be no indefinite depression or eternal boom period.

5.              Business cycles are pervasive in their effects.

6.              The up and down movements are not symmetrical. The downward movement is more sudden and violent than the upward movement.

Phases of a Business Cycle: A business cycle is identified as a sequence of four phases, viz., recovery, boom, recession and depression. 

Boom:

1. During the boom phase, production capacity is fully utilized and also products fetch an above-normal price which gives higher profit.

2.              This attracts more and more investors. To manufacture more number of products entrepreneur purchases new machines and also employees work at higher wage rate.

3.              The increasing cost tendency of the factors of production leads to a continuous increase in product cost.

4.              The fixed income group or the salaried class finds it difficult to cope with this increase in prices. As their income does not increase accordingly, they are now compelled to reduce their consumption. The demand is now more or less stagnant or it even decreases. Thus the boom or prosperity reaches its peak. 

Recession:

1.              Once economy reaches the peak the course changes. A downward tendency in demand is observed.

2.              The producers who are not aware of this trend go on producing. The supply now exceeds demand.

3.              The producers come to notice that their stocks are piling up. They are compelled to give up future investment plans. The order for new equipments and raw materials are cancelled. A businessman even cuts down his existing business. 4. Workers are retrenched.

5. Bankers insist on repayment, stocks accumulate, business failure increases, investment ceases and unemployment expands.

. Unemployment leads to fall in income, expenditure, prices, profits and industrial and trade activities.

Desire for liquidity increases all around. Producers are compelled to reduce price so that they can find money to meet their obligations. Consumers who expect a still further decline in prices postpone their consumption. Stocks go on piling up. Some firms are forced into bankruptcy. The failure of one firm affects other firms with whom it has business connections. There is general distress. This phase of the business cycle is known as the crisis. It is the utmost suffering for a business. 

Depression:

1.              Under employment of both men and materials is a characteristic of this phase.

2.              General demand falls faster than production.

3.              Producers are compelled to sell their goods at a price which will not even cover the full cost.

4.              Manufacturers of both capital goods and consumers goods are forced to reduce the volume of production. As a consequence, workers are thrown out. The remaining workers are poorly paid.

5.              The demand for bank credit is at its lowest which results in idle funds. The interest rates also decline.

The firms that cannot pay off their debts are wound up. Prices of shares and securities fall down. Pessimism prevails in the economy. The less-confident investors are not ready to take up new investment projects. The aggregate economic activity is at its bottom.

Recovery:

Depression phase does not continue indefinitely. Depression contains in itself the germs of recovery. The idle workers now come forward to work at low wages. As the prices are at their lowest, the consumers, who postponed their consumption expecting a still further fall in price, now start consuming. The banks, with accumulated cash reserves, now come forward to give loans at easier terms and lower rates. As the demand increases, the stocks of goods become insufficient. The economic activity now starts picking up, investment^-picks up, and employment and output slowly and steadily begin to rise. Increased income leads to increase in demand, resulting in rise in prices, profits, further investment, employment and incomes. The wave of recovery once initiated--soon begins to feed upon itself. Stock markets become alive thus hastening the revival. Optimism develops among the entrepreneurs. Bank loans and demand for credit start rising. The depression phase then gives way to recovery.