BUSINESS TRADE CYCLE
Part of capitalist system Refers to the phenomenon of cyclical booms and depressions There are wave-like fluctuations in aggregate employment, income output and price level.
A trade cycle is composed of periods of good trade characterized by rising prices and low unemployment percentages, altering with periods of bad trade characterized by failing prices and high unemployment percentages.
- By J. M. Keynes
A business cycle can be defined as wavelike fluctuations of business activity characterized by recurring phases of expansion and contraction in periods varying from 3 to 4 years.
CHARACTERISTICS OF BUSINESS CYCLES
[Link] fluctuations [Link] of business cycle is longer than a year [Link] of alternating forces of expansion and contraction 4. Phenomenon of the crises
The Short Kitchin Cycle
The Long Jugler Cycle
The Very Long Kondratieff Cycle Building Cycles
Kuznets Cycle
Every business cycle has the critical mark-off points of peak and trough. From trough to peak there is the expansion phase and from peak to trough the contraction phase.
The upper turning point located at the peak marks the beginning of recession while the
lower turning point located at the trough is the venue of revival.
Typically a business cycle has 4 phases :
1. Expansion or Prosperity or the Upswing 2. Recession or Upper-Turning Point
3. Contraction or Depression or Downswing
4. Revival or Recovery or Lower turning point
EXPANSION
Begins from an equlibrium position under the stimulus of forces which creates expectations of rising profits which in turn induce entrepreneurs to increase the scope of their activities.
Prices rise but wages, salaries, interest rates, rentals and taxes do not rise in proportion to the rise in prices. The gap between prices and cost increases the margin of profit.
Characteristics of expansion phase
Demand for consumer goods and production
rises Liberal bank credit Investment increases More profits Rise in price Demand, output, employment are at a high level
RECESSION
Recession starts when there is a downward descends from the peak which is of a short
duration.
It marks the turning period during which the
forces that make for contraction finally win over the forces of expansion.
Characteristics of recession phase
Fall in income or output
Increase in unemployment
Strain in the banking system Fall in prices
Liquidation in the stock market
Decline in profits
Example
2008-2009 Recession The worst recession since the Depression. The economy shrank in five quarters. Two quarters shrank more than 5%. The recession ended in Q3 2009, when GDP turned positive, thanks to economic structure spending. The recession was also the longest since the Depression, lasting 18 months.
The recession was caused by the Subprime mortgage crises, which then led to a global banking credit crises.
DEPRESSION
Recession leads to depression when there is a general decline in economic activity. There is considerable reduction in the production of goods and services, employment, income, demand and prices. The general decline in economic activity leads to a fall in bank deposits. Credit expansion stops because the business community is not willing to borrow. Bank rate
falls considerably.
Characteristics of depression phase
Mass unemployment
Fall in prices, profits, wages, interest rate, consumption, expenditure, investment, bank deposits, loans Factory closedown
Fall in profits
RECOVERY
It starts from a situation when depression has lasted from some time and revival phase or the
lower-turning point starts.
Suppose the semi-durable goods wear out
which necessitate their replacement in the economy. It leads to increased demand. To meet this increased demand, investment and employment increase.
Characteristics of recovery phase
Increase in investments
Increase in employment and demand for products
Increase in output and profits
Expansion in bank credit
Business expectations improve
FACTORS SHAPING BUSINESS CYCLES
Volatility of investment Spending Momentum Technology Innovations Variation in Inventory Fluctuation in Government Spending Politically Generated Business Cycles Fluctuations in Imports and Exports
METHODS TO CONTROL TRADE CYCLES
1. Monetary cycle Credit creation Credit control
2. Fiscal policy Taxation policy Public expenditure Public debt
