Phases of the Business Cycle | Different Phases of the Business Cycle
What is business cycle?
- The Trade cycle or Business cycle is a part of the economics system. It means fluctuation in economic activities or ups and downfall in economic activities such as increasing or decreasing Investment, Output, Employment, and level of income. The phases of business cycle has been defined in various ways by different economists.
- According to Keynes, “A trade cycle is composed of periods of good trade, characterized by rising in price and low unemployment percentages, altering with periods of bad trade characterized by falling price and high unemployment percentage”.
- According to Prof. Estey, ” Cyclical fluctuations are characterized by altering waves of expansion and contraction. They do not have fixed rhythm, but they are cycles in that the phases of contraction and expansion recur frequently and in fairly similar patterns”.
- As per the above definition, business conditions differ from time to time i.e. the period of prosperity is followed by recession and so on affecting GNP, employment, real income, price level, profits, etc.
The features or characteristics of the trade cycle are:-
- Fluctuation: Trade cycles are fluctuations in the level of aggregate economic activities. It involves changes in employment, investment, profits GDP, etc.
- Different Phases: Phases of Business Cycle have different phases such as Prosperity, Recession, Depression, and Recovery.
- Expansion and Contraction: Expansion means rising in consumption, production, employment, prices, GDP, etc. and Contraction means a downfall in production, GDP, employment, consumption, price level, etc.
- Recurrent: The Phases of Business Cycle is not periodic. It does not occur regularly. Trade cycles occur periodically but they do not show the same regularity.
- Trough: This is a turning point where the economic activity is at the lowest. The trough may be short-lived or may continue at the bottom for sometimes but it’s a sign wave for reviving the economy.
- Peak: The expansionary process reaches a very high level of production known as the peak. It symptom of the end of the prosperity and beginning of the recession.
Different Phases of Trade Cycles
The Phases of Business Cycle mean ups and downs in the economy are reflected by the variation/fluctuation in macroeconomics variables such as GNP, investment, profits, price, employment, wages, etc. This variation shows different phases in figure 4.2.
Prosperity phase characteristics by:
- With a large volume of output, there is a high level of employment and there is a high-level income.
- There is a rise in interest rate, the high marginal efficiency of capital.
- There is an increase in the supply of money, an increase in economic transactions and bank credit, and overall business optimism.
Recession Characteristics by:
- A downfall in the level of employment.
- A fall in factor prices and commodity prices.
- A reduction in the output of goods and services.
- Investment starts falling due to the decline in the rate of profit, a sharp decline in reserve
- The stock market is depressed and the share prices fall rapidly
Depression phases characteristic by :
- A continuous fall in the level of output, trade and transaction, price deflation, contraction of bank credit.
- With the decline in MEC and investment, the economy operates at its lowest capacity.
- A considerable fall in the interest rate and wage rate and overall business pessimism.
- When the economy enters recovery phases that indicate positive symptoms, the economic activities start rising such as output, income, employment, investment, etc. but the growth rate may still remain below a steady growth rate.
- In the recovery phase, consumers increase their rate of consumption, as they assume that there would be no further reduction in the prices of products. As a result, the demand for consumer products increases.
- The price mechanism plays a very important role in the recovery phase of the economy.
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Reference: Manan Prakashan, Economicdiscussion