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Business Cycles

Fluctuations in Real GDP (The total market value of all


final goods and services produced in a country in a given year, equal
to total consumer, investment and government spending, plus the
value of exports, minus the value of imports)

referred to as

Business Cycles.
The duration and intensity of each phase of
the Business Cycle are not always clear.
Business Cycles are typical of Market,
Capitalistic economies due to the free nature
of those economic systems.

What is a business cycle?

A business cycle refers to periods of


expansion and contraction. A peak is the high
point following a period of economic
expansion. A trough is the low point following
a period of economic decline.

Definition

Acc to Professor Haberler The Business


Cycle in the general sense may be defined as
an alternation of periods of prosperity and
depression of good and bad trade.

Types of Cycles:
1.The Short Kitchen Cycle: Joseph Kitchin - 1923-British Economist - Also
Known as Minor Cycle.
- 40 Month duration
- Dis b/w Major and Minor Cycle-1923
- Major Cycle-composed of 2 or 3 Minor cycle.

2. The Long Jugler Cycle: Jugler-1862-French Economist


- Also Known as Major Cycle
- Fluctuation of business activity b/w successive crises
- Duration- 9 yrs

Types of Cycles:
3. The Very Long Kondratieff Cycle: N.D.Kondratieff-1952-Russian
Economist
Very Long cycle Kondratieff wave
- Duration More than 50 yrs
-

4. Building Cycle: Warren & Pearson -2 American Economist-1937


- Relates to the building Construction
- Duration- twice that of Major Cycle -18Yr
5. Kuznets Cycle: Prof. Simon Kuznets- American Economist
- Propounded new cycle- Secular Swing-16-22yr
- dwarfs -7 to 11 yrs relatively insignificance

Phases Of a Business Cycle

A typical Cycle is generally divided in to four


Phases
1.

2.
3.
4.

Expansion Or Prosperity Or the Upswing


Or Boom
Recession Or Upper-turning point.
Contraction or Depression or Downswing
Revival Or Recovery Or Lower Turning
Point

% Change in Real GDP

Recession Or Peak
Expansion

0%
Contraction

Recovery

a
b
o
v
e

Upswing phase
Recession Phase
Equilibrium

Inflection point
b
e
l
o
w

Inflection point

Inflection point
Revival
Depression phase

Expansions Or Boom
Expansions are periods of increasing Real
GDP.
Unemployment decreases, businesses
expand, and Personal Consumption
increases.
As expansions continue, there tend to be
upward pressures on prices (inflation) and
interest rates.

Peak Or Recession
A peak is a period when the economy starts
to level off.
Businesses postpone new investments, and
consumer saving tends to increase.
Rising prices and interest rates tend to
restrict purchases and investments, often
leading to a Contraction.

Contraction Or Depression
A Contraction is a period of declining Real
GDP.
Consumer

spending

decreases,

and

unemployment increases as businesses layoff


workers and shorten work hours.
Interest rates and prices level off, and often
decline during long contractions.

Long Term Contractions

Recession:
Six months of declining Real GDP

Depression:
Twelve months of declining Real GDP
coupled with at least 15%
unemployment.

Trough Or Recovery Or
Lower Turning Point

A Trough is the bottom of a Contraction.


Lower interest rates and prices bring
customers back to markets.

Things That Affect the Business


Cycle
Business Investment: High levels of business
investment (capital good increases like
machinery and equipment) promote
expansion. Low levels of business investment
contribute to contraction.

Money and credit: When interest rates go up,


people borrow less, and this less money is
circulating in the economy, thus contributing to
a contraction.

Things That Affect the Business


Cycle

Public Expectations: People will increase

their spending if they believe the economy is


strong. This helps promote expansion.

External Factors: Like energy crisis and war.

Theories Of Trade Cycle

1. Sun-Spot Theory Or Climatic Theory:


Jevons & Moore
-based on climatic variation
- Climatic variation are due to spots of sun
so it is called sun-spot theory.
2. Psychological Theory: A.C.Pigou,
Beveridge & others
- Psychological feelings

Theories Of Trade Cycle

3. Hawtreys Theory Or Monetary Theory:


- Trade cycle is purely a Monetary Phenomenon &
Natural Causes like climatic condition, earthquake etc.,
-Changes in flow of money
- Inflation & Deflation created by ROI

4. Von Hayeks Theory Or Over-Investment


Theory: Prof Von Hayek.
- basis of Monetary Over-investment and
consequent over-production

Theories Of Trade Cycle

5. Over Saving Or Under Consumption


Theory:
- Trade cycle is purely a Monetary Phenomenon &
Natural Causes like climatic condition, earthquake etc.,
-Changes in flow of money
- Inflation & Deflation created by ROI

4. Von Hayeks Theory Or . Psychological


Theory: A.C.Pigou, Beveridge & others
- Psychological feelings