Business Cycle
In a modern dynamic economy, many fluctuations occur in business and other economic activities.
These fluctuations occur in more or less regular time sequence. Some of these fluctuations are
abrupt, isolated and discontinuous. They are rhythmic and recurrent in nature.
Business cycle implies wave-like fluctuations in aggregate economic activity particularly in national
income, employment and output. It is mostly present in a capitalist society. These fluctuations rarely
occur in a well-planned socialist economy.
According to W.C.Mitchell “Business cycles are a species of fluctuations in the economic activities of
organised communities. The adjective ‘business’ restricts the concept of fluctuations in activities
which are systematically conducted on a commercial basis. The noun ‘cycles’ bars out fluctuations
which do not recur with a measure of regularity”
According to J.M.Keynes “A trade cycle is composed of periods of good trade charactersied by rising
prices and low unemployment percentages, altering with periods of bad trade charactersied by
falling prices and high unemployment percentages.”
According to Frederick Benham “A trade cycles may be defined rather badly as a period of prosperity
followed by a period of depression. It is not surprising that economic process should be irregular,
trade being at some time and bad at ethers”
According to McNair and Meriam “It is not the existence of ups and downs in the rate of activity in
particular industries that constitute business cycles but rather the fact that the timing of these
fluctuations tends to be roughly the same in many areas of business activity.”
Prof Haberler states that “the business cycles in the general sense may be defined as an alternation
of periods of prosperity and depression of good and bad trade.”
R.A Gordon states that “ The business cycles consists of recurring alternation of expansion and
contraction in aggregate economic activity, the alternative movements in each direction being self-
reinforcing and prevading virtually all parts of the economy.”
Features of Business Cycle
1. Business cycle is a wave like movement.
2. Cyclical fluctuations in economic activity are known as business cycles.
3. These fluctuations are recurrent in nature.
4. Business cycles are cumulative and self-reinforcing in nature.
5. It contains self-generating factors.
6. Business cycle is synchronic in character.
7. The length of the cycle differs widely, but they have same pattern.
8. Trade cycles are also international in character.
Characteristics of Business Cycle
1. The duration between two major cycles is 6 to 12 years.
2. It has been empirically found that during a period of prosperity the business activity is
usually 10% to 25% above the long-term trend, while during depression it is 5% to 25%
below the trend.
3. Generally prosperity takes twice as much time to develop s the depression.
4. The phases and their sequence is same an all cycles.
5. It has been found that if the boom is high the succeeding will also be severe. But this
relationship may not hold good in the reverse, i.e. severe depression need not be followed
by a high boom.
6. In every business cycle, there are cyclical changes in the general price level. But the
beginning of prosperity, as also of depression, is charactersied by changes in the prices of
stocks and shares, which appear before any changes appear in the whole price or in total
production.
7. After the change in prices of stocks and shares, changes take place in the wholesale prices
and in the volume of production. They appear before changes in the interest rate and wage
rate manifest themselves.
8. Amongst the commodities, the prices of raw materials fall or rise earlier than those of final
goods.
9. In general, the retail prices, to a certain extent, lag behind the wholesale prices in both the
prosperity and the depression.
Phases of Business Cycle
1. Expansion:- It is phase charactersied by a very high marginal efficiency of capital, resultant
increased investment, higher level of income and higher level of employment. Peak is the
highest point of prosperity.
2. Recession: - Once the peak is reached, slowly crisis begins. The expansion phase is replaced
by Recession. The marginal efficiency of capital comes down. This creates panic among
business people. Unemployment and lower level of income persists and slowly give place to
the phase of contraction.
3. Contraction:-It is charactersied by low level of economic activity. This phase is known for
unemployment, lower level of income, falling prices and declining profits.. It is also
charactersied by overall curtailment of aggregate economic activity at its bottom. The lowest
point is known as trough. Revival begins after this point.
4. Revival: - The marginal efficiency of the capital gradually increases. Pessimist gets slowly
replaced by optimist. This allows for the gradual increase in investment, employment and
output. And revival turns into prosperity.
Theories of Business Cycle
The following are the theories of business of business cycles.
1. The sunspot Theory.
2. Psychological Theory.
3. Under-consumption Theory.
4. Over-investment theory.
5. Monetary Theory.
6. Keynesian Theory.
7. Hicksian Theory.
8. Innovation Theory.
9. Nicholas Kaldor’s view on Trade Cycle.
Effects of Cyclical Fluctuations
Business cycles create adverse effects on the economic system as a whole.
• The phases of crisis and contraction create disastrous and highly harmful effects on
individuals as well as on commercial and business.
• Financial institutions also suffer during these periods.
• Higher prices of raw-materials and increased wages of labour during crisis phase lead to
many difficulties for a business unit.
• Income, employment, output prices and other aggregate activity falls which obviously brings
down the profits of industrial units.
• The great depression of 1929, have witnessed 17% down in industrial activity in advanced
countries like US, England etc.
• During revival and expansion phase, operation costs of the firm shoot up.
• Credit becomes available at higher cost.
• Competition becomes tough and poses a threat to survival of some firms.
• It reduces or changes the market share of business units.
Measures to control Business Cycles
As cycles cannot be totally controlled, but measures cam be taken to control the effects of the
cyclical fluctuations.
The following are the steps need to be taken for the control of the same.
1. Monetary Measures.
2. Fiscal Measures.
3. Socialistic Measures, and
4. Direct Measures.
