Business Cycle

INTRODUCTION

In capitalistic economies the economic activities are not alike. Sometimes there is brisk in business life while on other occasions, the business activity is sluggish. Such like ups and downs in business are accorded as business cycle or trade cycle. In other words, the business fluctuations are termed as business cycle. As Habeler says, “Business cycles are just the names of prosperity and adversity; good trade and bad trade”.

PHASES OF TRADE CYCLE

A trade cycle is furnished with four phases. They are:

Depression

In this situation, the economic activities are prey to slackness. The level of income and employment falls. The demand for goods and services shrinks. As a result, the prices of goods and services fall. The profits of producers decrease. Being disappointed, they lead to decrease the production and employment. Particularly, there is a big fall in the production of capital goods industries. The funds get accumulated with the financial institutions and the businessmen are reluctant to get loans even at reduced rates of interest. In nut shell, during depression, the level of prices, consumption, income, employment, wages and interest rate, etc. reach at the lowest ebb.

Revival or Recovery

  The depression does not last for ever. Economy, gradually converts itself into revival. The consumers who had postponed their expenditures in the hope of further cut in the prices raise their expenditures when the prices do not fall further. The producers who face big losses during depression, leave the business. The remaining firms indulge themselves in the replacement of existing machines. In this way, the demand for capital goods will rise, though in a slower quantity. When the firms go on producing the consumer and capital goods, the demand for loans starts rising. In this way, the recovery emerges. Accordingly, the price level, wages, interest rate, rate of profit, employment and production start rising gradually.

Prosperity or Boom

   The revival culminates into boom or prosperity. In the period of revival when profits rise, the firms get loans from the banks. In this way, the rate of interest starts rising up. But as he economy crosses the level of full employment inflation is generated. As a result, the prices and costs rise very sharply. Simply, during boom, the price level, consumption expenditures, income of people, wages. Profits, employment and output reach the highest level.

Recession

 The boom does not last for ever. The germs of sluggishness develop during the period of prosperity. The banks had advanced loans excessively. They start realizing that their reserves have fallen to a greater extent. Accordingly, they tighten their policy of advancing loans. On the other hand, the firms who have produced a lot has to be sold at decreased prices. Moreover, the sticky wages are also a problem for the producers. Such all phenomena result in great losses to the producers. Being disappointed, there is a big cut in the output and employment. The recessionary trends develop in the economy and the economy reaches where from we started.