Introduction to business cycle

The term business cycle (or economic cycle) refers to economy-

wide fluctuation in production or economic activity over several months
or years. These fluctuations occur around a long-term growth trend, and
typically involve shifts over time between periods of relatively rapid
economic growth (expansion or boom), and periods of relative
stagnation or decline (contraction or recession).
These fluctuations are often measured using the growth rate of real gross
domestic product. Despite being termed cycles, most of these
fluctuations in economic activity do not follow a mechanical or
predictable periodic pattern
The business cycle is the periodic but irregular up-and-down
movements in economic activity, measured by fluctuations in real
GDP and other macroeconomic variables. If you're looking for
information on how various economic indicators and their relationship to
the business cycle,
 A business cycle is not a regular, predictable, or repeating phenomenon
like the swing of the pendulum of a clock. Its timing is random and, to a
large degress, unpredictable. A business cycle is identified as a sequence
of four phases:
Periodic fluctuation in the rate of economic activity, as measured by
levels of employment, prices, and production. Economists have long
debated why periods of prosperity are eventually followed by economic
crises (stock-market crashes, bankruptcies, unemployment, etc.). Some
have identified recurring 8-to-10-year cycles in market economies;
longer cycles have also been proposed, notably by Nikolay Kondratev.
Apart from random shocks to the economy, such as wars and
technological changes, the main influences on the level of economic
activity areinvestment and consumption. An increase in investment, as
when a factory is built, leads to consumption because the workers
employed to build the factory have wages to spend. Conversely,
increases in consumer demand cause new factories to be built to satisfy
the demand. Eventually the economy reaches its full capacity, and, with
little free capital and no new demand, the process reverses itself and
contraction ensues. Natural fluctuations in agricultural markets,
psychological factors such as a bandwagon mentality, and changes in
the money supply have all been proposed as explanations for initial
changes in investment and consumption. After World War II many
governments used monetary policy to moderate the business cycle,
aiming to prevent the extremes of inflation and depression by
stimulating the national economy in slack times and restraining it during
expansions. A business cycle is a swing in total national output, income,
and employment, usually lasting for a period of 20 to 10 years, marked
by widespread expansion or contraction in most sectors of the economy.

Features
 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
 A business cycle affects the entire economy. All 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
 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
 A business cycle affects the entire economy. All 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

Phase of business cycle

There are four interrelated phases of a trade cycle. According to
Burns & Mitchell these are-
 Revival
 Expansion
 Recession
 Contraction
The peak & trough are the critical mark-off points in the
cycle
The greater part of the cycle is divided into
a. Expansion phase which extends from trough to peak
b. Contraction phase which from peak to trough
In addition there are upper & lower turning points.
At the lower turning point, revival starts & the economy
moves into the expansion phase from that point
At the upper turning point recession takes hold of the
economy & after that point the economy moves into the
contraction phase

Phase of business cycle according to

schumpeter:
 He does not start from a trough (peak) and end up with the next
trough (or peak)
 According to him a trade cycle starts with the neighbourhood of
equilibrium (critical mark-off points) preceding prosperity & end
up with the neighbourhood of equilibrium following revival. In his
theory the critical mark-off points are found at or near the points of
inflection
 A business cycle according to Schumpeter represents wave-like
deviations in the level of business activity from equilibrium or
trend line
 Business cycle is broadly divided into two parts- the upper half &
the lower half
 In the upper half part of the cycle the level of economic activity is
above the normal & in the lower half the level of economic activity
is below normal
 The upper half part of the cycle which extends from A to B is
divided into prosperity & recession
 The lower half which extends from ‘B’ to ‘C’ is divided into
depression & recovery
 The four phases of business cycle in the Schumpeterian model are
–

 Prosperity – here income & employment continue to increase but

at diminishing rates until the peak is reached
 Recession – 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
  Depression – here income & employment still go on decreasing but
at diminishing rates, until the cycle trough is reached
 Recovery – income & employment increases at increasing rates
until they reach normal levels.

Remdial measures to business

cycle:
1. Fiscal Measures: During the period of boom, decrease in public
expenditures, increase in taxes and increase in public debt. On
the other hand, during the period of depression, the policy of
increase in public expenditures, decrease in taxes and decrease
in public debt is adopted by the government.

2. Monetary Measures: Monetary measures mean that control of

money and credit supply in the country. When we are facing
boom or inflation, the central bank reduces the total quantity of
money in circulation. The bank can adopt different measures
likebank rate policy, open market operations and rationing of
credit etc. 
On the other hand, incase of depression, the central bank can
increase the quantity of money by lowering the bank rate or
purchasing the securities and discounted the bills of exchange.

3. International measures: Today every country has trade relation

with other countries. If there is inflation or deflation in one country,
it can be easily be carried top other countries, the example of
great depression can be given. business cycle is an international
phenomena and it should be tackled on international level.
Different measures have been suggested by the economists to
control the business fluctuations effectively.

Such as: 

(a). Control of international production.

(b). International bill stock control and international investment
control.

4. State control of private investment: If the govt. controls the

private investment, cyclical fluctuations can be controlled within
limits while the other economists who this agree with the above
view, they say that private investment will be discouraged. But
J.M. Keynes says that if we adopt the middle way we can control
the fluctuations