Management Economics: Define 'Business cycle'. Explain various phases of business cycle?

Topics: Unemployment, Keynesian economics, Monetary policy Pages: 8 (1883 words) Published: September 25, 2005
Introduction.

The business cycle or economic cycle refers to the ups and downs seen somewhat simultaneously in most parts of an economy. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), alternating with periods of relative stagnation or decline (contraction or recession). These fluctuations are often measured using the real gross domestic product.

To call those alternances "cycles" is rather misleading, as they don't tend to repeat at fairly regular time intervals. Most observers find that their lengths (from peak to peak, or from trough to trough) vary, so that cycles are not mechanical in their regularity. Since no two cycles are alike in their details, some economists dispute the existence of cycles and use the word "fluctuations" instead. Others see enough similarities between cycles that the cycle is a valid basis of studying the state of the economy. A key question is whether or not there are similar mechanisms that generate recessions and/or booms that exist in capitalist economies so that the dynamics that appear as a cycle will be seen again and again.

Just as there is no regularity in the timing of business cycles, there is no reason why cycles have to occur at all. The prevailing view among economists is that there is a level of economic activity, often referred to as full employment, at which the economy theoretically could stay forever. Full employment refers to a level of production at which all the inputs to the production process are being used, but not so intensively that they wear out, break down, or insist on higher wages and more vacations. If nothing disturbs the economy, the full-employment level of output, which naturally tends to grow as the population increases and new technologies are discovered, can be maintained forever. There is no reason why a time of full employment has to give way to either a full-fledged boom or a recession.

Text.

Business Cycle, term used in economics to designate changes in the economy. Ever since the Industrial Revolution, the level of business activity in industrialized capitalist countries has veered from high to low, taking the economy with it.

Characteristics of business cycle are:

-A trade cycle is wave like movement.

-Cyclical fluctuations are recurrent in nature.

-Expansion and contraction in a trade cycle are cumulative in effect.

-Trade cycles are all pervading in their impact.

-It is characterized by the presence of crisis i.e. downward movement is more sudden and violent than the change from downward to 0upward.

-Cycles differ in timing and amplitude they have a common pattern of phases, which are sequential in nature.

Phases Of Business Cycles:

The ups and downs in the economy are reflected by the fluctuations in aggregate economic activities such as production, investment, employment, prices, wages, bank credits etc. The various phases of the trade cycles are:

Prosperity: Expansion And Peak.

This phase begins with the rise in the national output, consumer and capital expenditure, level of employment and inventories. Debtors find it more convenient to pay off their debts. Bank rate increases so credit facilities, idle funds for investment in production since stock prices increases due to increase in profitability and dividend. Purchasing power continues to flow in and out of all kinds of economic activities. Expansion continues with the multiplier process.

In earlier/ later stages additional workers can be obtained by giving higher wage than prevailing in the market. Input prices increases rapidly which leads to increase in cost of production. As a result price increases and cost of living increases which lower the consumption rate. The demand for new houses, cement, iron, labor tends to halt and same is for furniture, automobiles etc. This makes reaching the peak. To summarize we can say that:

-It is a turning point in the business cycle -...
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