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(6) In every business cycle there are cyclical changes in the general
price level. But the beginning of prosperity, as also of depression,
is characterized by changes in the prices of stocks and shares,
which appear before any changes appear in the wholesale price of
in total production.
(7) After the changes in prices of stocks and shares, changes take
place in the wholesale prices and in the volume of production.
They appear before changes in the interest rate and wage rate
manifest themselves.
(8) Amongst the commodities, the prices of raw materials fall or rise
earlier than those of final goods.
(9) In general, the retail prices, to a certain extent, lag behind the
wholesale prices in both the prosperity and the depression.
(2) Prosperity:
During this phase there is a rapid cumulative
movement of prices, employment, income and production. The
prices and general business activity is above the normal. Total
output starts growing at a rapid pace due to higher investment and
employment. Prices of finished products rise faster than the
increase in wage-rate, raw material prices and interest rate.
Consequently, producers stand to gain.
(3) Recession:
When the business cycle takes a downward turn
from the state of prosperity, the state of recession is said to
have set in. During the phase of prosperity, production
increases with every increase in commodity prices. As more
and more of unemployment labour, capital and raw material
are employed, interest rate, wages and other costs rise with
increasing rapidity.
Profit margins decline further because costs start
overtaking prices. Business psychology becomes depressed
and the boom bursts. There is a struggle for solvency among
the businessmen. Some firms close down while others reduce
production, leading to reduction in investment, employment,
income and demand. This process is cumulative.
There is a collapse of confidence. If not controlled
in the beginning by timely monetary and fiscal measures by
government which can sustain investment at a high level,
recession may give way to even a more grave situation, called
depression.
(4) Depression:
If unchecked, depression is a natural consequence of
the recessionary crisis. Gradually, the process of falling prices,
demand and employment gather momentum. Decrease in
price follows the same sequence as does the price increase in
case of the state of boom.
In this phase, general demand for goods and services
falls faster than the production of goods, though this is more in
case of capital goods than consumer goods.
In general, the bottom of depression is reached when
liquidation of accumulated stocks is completed. Depression is,
thus, characterized by low prices, idle funds with banks, mass
unemployment and slack trade.
The important features to be noted in this
connection are that the different phases follow each other in a
regular sequence; cycles continue one after another. Secondly,
the cycle shows fluctuations in total output and not of any
single commodity or a group of commodities. Lastly, within the
movement of total output, production of capital goods and
durable consumer goods reveal greater fluctuations than the
production of other goods. The main features of the four
phases of business cycle are represented in the form of a table.
V = home investment
X = exports
M = imports
p = proportion of income spent on home-produced consumption
goods.