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The recurrent ups & downs in the level of economic activity in an

economy

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x trade cycle is composed of periods of good trade

characterized by rising prices & low unemployment percentages
altering with periods of bad trade characterized by falling prices &
high unemployment percentages´

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business cycle represents wave like fluctuations in the level of

business activity about the equilibrium or trend line

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They are fluctuations in aggregate economic activity which can

be represented by the levels of total output, income,
employment, prices, profits etc in the economy. Output, income,
employment, prices, etc move together. They go up during
upswings & go down during the period of downswings

There are recurring phases of expansion & contraction in the

level of economic activity

There is an automatic mechanism through which phases of

expansion & contraction of the level of economic activity
automatically come after one another

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The phases of expansion & contraction in cyclical fluctuations are

recurrent but there is nothing periodic about them

Business cycles also vary in their amplitudes. The difference

between the peak & the bottom levels reached by the aggregate
economic activity during the full course of a complete trade cycle
is called the amplitude of the trade cycles

business cycle affects the entire economy. ll sectors & all

industries are affected by it but they are not equally affected

The cyclical fluctuations are internationally propagated through

international trade; but all the countries are not equally affected
by a trade cycle originated in a country

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There are four interrelated phases of a trade cycle. ccording to

Burns & Mitchell these are-
D [evival
D Expansion
D [ecession
D Contraction

The peak & trough are the critical mark-off points in the cycle

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Peak
Level
1st phase 2nd phase
Of
NI
[ecession
Prosperity B C

Trend
Depression [ecovery

3rd phase 4th phase

Trough

O Time

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The four phases of business cycle in the Schumpeterian model

are -
* ü
 X here income & employment continue to increase but
at diminishing rates until the peak is reached

* [ 

X here income & employment fall at increasing rates
until the next point of inflection is reached i.e. until the level of
economic activity reaches the normal level from the above
normal level

* @ 

X here income & employment still go on decreasing
but at diminishing rates, until the cycle trough is reached

* [
 X income & employment increases at increasing rates

until they reach normal levels


  
 


Earliest theory rests on the interaction

between the multiplier & the accelerator

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Multiplier theory states that income is

determined by investment.

This implies that

For a given level of aggregate output to be maintained

investment must be at a certain level

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This hypothesizes that current investment

depends upon the change in aggregate
output from previous year to this year

Thus

For a constant volume of investment to be maintained

output must grow at a certain rate

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Ceiling beyond which output cannot grow

- this is given by the full employment of labour force

 There must be a floor

X this is provided by the fact that gross investment cannot
be negative

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Fiscal & Monetary policies which seek to combat the business

cycles are referred to as stabilization policies

These policies try to counteract reduction in private expenditures

either by increasing public expenditures or by stimulating private
expenditures through tax cuts, lower interest rates etc &
viceversa

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