Introduction:
Economic history shows that no economy grows in a smooth and even pattern. A country may enjoy several years of economic expansion and prosperity, with rapid increases in stock prices (as in the 1990s) or housing prices (as in the early 2000s). Then, the irrational exuberance may flip over to irrational pessimism as, during the 2007–2009 period, lenders stop issuing mortgages or car loans on favorable terms, banks slow their lending to businesses and spending declines. Consequently, national output falls, unemployment rises, and profits and real incomes decline.
Eventually, the bottom is reached and recovery begins. The recovery may be incomplete, or it may be so strong as to lead to a new boom. Prosperity may mean a long, sustained period of brisk demand, plentiful jobs, and rising living standards. Or it may be marked by a quick, inflationary flare-up in prices and speculation, followed by another slump. Upward and downward movements in output, inflation, interest rates, and employment form the business cycle that characterizes all market economies.
The term “cycle” is used to describe a process that moves sequentially between a series of clearly identifiable phases in a recurrent or periodic fashion. Economists of the nineteenth and early twentieth centuries were persuaded that they saw such a pattern exhibited in the overall level of economic activity and enthusiastically sought to characterize the observed regularities of what came to be known as the “business cycle.”
Meaning:
Business cycles can be characterized as fluctuations in economic activity in the form of actual real output fluctuations around the potential output of the economy (i.e. the trend). The economic activity is either accelerating or decelerating. The economic cycle means alternating periods of growth and decline in real output.
In other words, business cycles are economy-wide fluctuations in total national output, income, and employment, usually lasting for a period of 2 to 10 years, marked by widespread expansion or contraction in most sectors of the economy. Trade cycles are wavelike movements of economic activity as a whole, marked by successive periods of rising and falling. During these wavelike movements employment, prices, consumer’s expenditure, production, and investment successively rise and fall.
Nature and Characteristics:
Business cycles can be characterized as fluctuations in economic activity in the form of actual real output fluctuations around the potential output of the economy (i.e. the trend). The economic activity is either accelerating or decelerating. The economic cycle means alternating periods of growth and decline in real output. In this case, there is a change in employment, investments, profits, and other variables. In practice, the focus is on the fluctuation of the real product.
The business cycle may have a growth trend, in that case, we are talking about an expansion, or fall trend, when talking about a contraction. A situation when the output does not decrease, or grow, and therefore has a zero change, is called stagnation.
The expansion phase is terminated by a peak of the business cycle and contraction by a trough. These points are called the “turning points”.
If the economy is in a phase of expansion, but the actual real output is below the potential output, we call this situation a recovery. If it is a phase of expansion, where the actual real output is greater than the potential product, we are talking about a boom.
Some economists choose the designation “crisis” instead of contraction. However, others use the term “crisis” to a significant decline in real output. When the contraction lasts longer than 6 months, this situation is called the recession. Particularly strong and long recession refers to depression and a sharp contraction refers to a slump.
One business cycle is defined as the period during which the economy performs motion between two consecutive turning points (e.g. between the two troughs). The duration, at which the economy passes such a movement, is referred to as a cycle period.
Four Phases of Business Cycles:
The four phases of a business cycle are Prosperity, Recession, Depression, and Recovery.
Prosperity: This phase is marked by an economic expansion that increases the demand for both capital and consumer goods. Companies invest in more production facilities and inventories in anticipation of taking advantage of increases in sales and profit. Low risk of default allows banks to lend capital for expansion at low-interest rates. Strong demand pushes the need for more workers to work in these industries, which spurs an increase in employment levels. Mopping up of resources in the economy leaves no room for expansion; inputs become expensive, signaling that the economy is at its peak.
Recession: In this phase, the economy slows down, and the level of sales and production orders starts declining. Production facilities become underutilized, and companies respond by reducing the work rate. Workers who had been hired on a casual basis are laid-off, and this reduces their disposable income. The prospects for growth become gloom; banks increase interest rates to counter the rise in the risk of default of loans. The idle capacity of production facilities reduces the output, and most companies are forced to reduce the prices of products in an attempt to increase demand.
Depression: This phase is marked by a severe and continuous decline in economic activity. A protracted period of recession ushers in depression. Demand for products and services decreases, forcing companies to shut down some production facilities. Closing of production means a company cannot sustain its workforce, and it is forced to lay them off. Unemployment leaves the consumers with very little disposable income needed to buy necessities. The gross domestic production declines and the standard of living of the people also declines. The fall in prices of capital goods is more than that of consumer goods. The demand for loans declines because investors' confidence has been wiped away. Companies that cannot meet costs of production and repayment of loans are forced to file for bankruptcy and liquidation.
Recovery: This phase is characterized by an increase in consumers' confidence in the market. The bank lending rates are low, and companies can afford to finance projects. There is an increase in productivity due to the increased aggregate demand in the economy. An increase in production allows companies to start employing, which in turn, increases the income of consumers who can now afford to purchase capital goods. Profit margins of companies start rising, and the gross domestic product also starts to increase.
No comments:
Post a Comment