INTRODUCTION

Business cycle or trade cycle is a part of the capitalist system. It refers to the phenomenon of cyclical boom and depressions.

In a business cycle, there are wave-like fluctuations in aggregate employment, income, output and price level.

The Business cycle in the general sense may be defined as an alternation of periods of prosperity and depression of goods and bad trade.

DEFINITION GIVEN BY SOME ECONOMIST

According to J.M.Keynes “A trade cycle is composed of periods of good trade characterized by rising prices and low unemployment percentages with periods of bad trade characterized by falling prices and high unemployment percentages”

According to Estey ”Cyclic fluctuations are characterized by alternating waves of expansion and contraction. They do not have a fixed rhythm, but they are cycles in that the phases of contraction and expansion recur frequently and in fairly similar patterns.”

TYPES OF BUSINESS CYCLE

•The Short Kitchin Cycle•The Long Jugler Cycle

•The Very Long Kondratieff Cycle•Building Cycle

•Kuznets Cycle

THE SHORT KITCHIN CYCLEIt is also known as the minor cycle

which is of approximately 40 months duration. It is famous after the name of British economist Joseph Kitchin .He came with a conclusion on the basic of his research that a major cycle is composed of two or three minor cycle of 40 months. He came to the conclusion that a major cycle is composed of 2 or 3 minor cycle of 40 months.

THE LONG JUGLER CYCLE This cycle is also known as the major

cycle. It is defined “As the fluctuation of business activities between successive crises”. In 1862 Clement Jugler, French economist showed that periods of prosperity, crises and liquidation followed each other always in the same order. Later economist have come to the conclusion that a Juger cycle’s duration is on the average 9 and ½ years.

THE VERY LONG KONDRATIEFF CYCLE N.D. Kondratieff, the Russian

economist, came to the conclusion that there are longer waves of cycles of more than 50 years duration, made of 6 Juger cycle. A very long cycles has come to be known as the Kondratieff wave

KUZNETS CYCLE Simon Kuznets, propounded a new

type of cycle, the secular swing of 16-22 years which is so pronounced that it dwarfs the 7-11 years into relative insignificance. This is known as Kuznets cycle.

BUILDING CYCLE Another type of cycle relates to the

construction of buildings which is of fairly regular duration. Its duration is twice that of the major cycle and is on an average of 18 years duration. Such cycle are associated with the name of Warren and Pearson.

FEATURES OF BUSINESS CYCLE

Business cycle occur periodically – they do not show same regularity , they have some distinct phases such as expansion , peak , contraction or depression and through . Further the duration of cycles varies a good deal from minimuxm of two years to a maximum of 10 to 12 yrs.

It has been observed that fluctuation occur not only in level of production but also simultaneously in other variables such as employment, investment, consumption, rate of interest, and price level.

Another important feature of business cycle is that investment and consumption of durable consumer goods such as cars house refrigerator are affected most by cyclic fluctuation.

Lastly business cycles are international in character . i.e. once started in one country they spread to another countries through trade relation between them . For example , if there is a recession in the USA which is a large importer of goods from other countries will cause a fall In demand for imports from other countries whose export would be effected causing recession in them too. Depression of 1930s in USA in Great Britain submerged the entire capital world.

PHASES OF A BUSINESS CYCLE

Recession

Contraction

Recovery

Expansion

These phases are recurrent and uniform in the case of different cycle. But no phase has definite time interval. Starting from the lowest, a cycle passes through a recovery and prosperity phase, rises to the peek, declines through a recession and depression phase and reaches to the lowest point.

A. RECOVERY During the period of recovery, there are

expansions and rise in economic activities. When demand starts rising, production increases and this causes an increase in investment. There is a steady rise in output, income, employment, prices and profits. The businessmen gain confidence and become optimistic (Positive). This increases investments. The stimulation of investment brings about the recovery of the economy

FEATURES OF RECOVERY Increase in Demand for durable Consumer

goods. Production/Output Increases. Employment Increases. Income increases. Price level increases. Optimistic environment.

B. PROSPERITY In the prosperity phase, demand, output,

employment and income are at high level. They tend to raise prices. But wages, salaries, interest rate, rentals and taxes do not rise in proportion to the rise in prices. The gap b/w prices and costs increases the margin of profit.

FEATURES OF PROSPERITY Employment is at its maximum level. Price level is at maximum point Output/Production is at its maximum

level. Turning point. i.e. from prosperity

phase to recession

C. RECESSION The turning point from prosperity to

depression is termed as Recession Phase. During a recession period, the economic

activities slow down. When demand starts falling, the overproduction and future investment plans are also given up. There is a steady decline in the output, income, employment, prices and profits. The businessmen lose confidence and become pessimistic (Negative). It reduces investment.

FEATURES OF RECESSION Decrease in Demand for durable

Consumer goods. Production/Output Declines. Employment decreases. Investment declines. Income decreases. Worried Environment

D. DEPRESSION

Recession merge into 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.

FEATURES OF DEPRESSION Employment is at its lowest level. Price level is at lowest point. Output/Production is at its lowest level. Turning point. i.e. from depression

phase to recovery. Demand for durable goods is at its

lowest level.

FACTORS CAUSING BUSINESS CYCLE

Business CycleExternal Factors

Internals Factors

EXTERNAL FACTORS War:- During war days all the available resources are

utilized for the production of weapons which greatly affect the product of both capital and consumer goods.

Postwar Period:- In the postwar period the level of consumption

and investment goes upwards. Both the government and individuals involves in the contracture (houses, roads, bridges etc) due to this economic activities, output, income, and employment goes up.

Scientific Development:- Every day new products comes to the

markets like mobile, laptop, etc. These products require a huge amount of investment through which new technology of production can be adopted. All this increases, employment and profit and plays an important role in the revival of economy.

Surplus, Exports and Foreign Aid:Surplus, exports, and foreign aid raises the

level of consumption and investment spending which helps in increasing output, income, and employment level.

Weather:- It is one of the causes of business cycle.

It is an important factor which causes economic activities. If any year weather is good the output of agricultural sector will goes upwards.

Population Growth Rate:- It is one of the factor of business cycle.

If the population growth rate is higher than the economic consumption, expenditure and saving will be low.

INTERNAL FACTORS Bank Credit :- According to Hawtery, cyclical fluctuation are

caused by expansion and contraction of bank credit. These in turn leads to changes in the demand for money on the part of producers & traders. Credit is expanded or reduced by the bank lowering or raising the rate of interest or by purchasing and selling of securities to traders.

Over-Saving or Under-Consumption:- According to economists like Hobson, Foster

and Douglas, business cycles are caused by over saving or under consumption. They argue that wide disparities of income and wealth leads to depression in the country. The rich people are not able to spend their entire income. So they save more and invest more in producing consumer goods. On the other hand, the poor people have low income or wages. As a result, their demand for consumer goods is low which means that there is under-consumption.

Over-Investment:-According to Hayke, it is bank loan which leads

to over investment in capital goods industries relative to consumer goods industries that ultimately brings depression in the economy. When the total money supply exceeds the amount of voluntary saving, it leads to increase in the investment activity and ultimately to a boom.

Psychological Causes:-According to Pigou, the alternating waves of

“over optimism” and “over pessimism” are the sole causes of the industrial fluctuation. He traces cyclical fluctuation to the tendency of business to react excessively to the changing conditions of the economy.

FEATURES OF BUSINESS CYCLE

Movement in Economic Activity : A trade cycle is a wave-like movement in economic activity showing an upward trend and a downward trend in the economy.

Periodical : Trade cycles occur periodically but they do not show the same regularity.

Duration : The duration of trade cycles may vary from a minimum of 2 years to a maximum of 12 years.

Dynamic : Business cycles cause changes in all sectors of the economy. Fluctuations occur not only in production and income but also in other variables like employment, investment, consumption, rate of interest, price level, etc.

Phases are Cumulative : Expansion and contraction in a trade cycle are cumulative, in effect, i.e. increasing or decreasing progressively.

International Nature : Trade Cycles are international in character. For e.g. Great Depression of 1930s.