Business cycle

An important feature of the working of a capitalist economy is the existence of alternating periods of prosperity and depression generally referred to as business cycle. The British economist call it Trade cycle. Keynes defined: A trade cycle is composed of periods good trade characterized by rising prices and low unemployment percentages, altering with periods of bad trade characterized by falling prices and high unemployment percentage.

Phase of typical(or standard) business cycle

Characterized by following five phases: Depression: It is a protected period in which business activity in the country is far below the normal. It is characterized by: Business activity is at its lowest point Sharp reduction of production Mass unemployment Falling price Falling profit

Cont.
Low wages Contraction of credit Investment in capital goods is very low High rate of business failure An atmosphere of all round pessimism and despair

Diagram represents various phases of Business cycle

Fig.
Y
Prosperity Prosperity Boom
Full employment

Level of business activities

Boom

Recession Recovery

Depression

2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

No. of years

Cont.
Recovery or (Revival): It implies increase in business activity after the lowest point of depression has been reached. This phase is characterized by. Slight increase in production Improvement in employment Slow but slight increase in price Increase in profit Slight improvement in wages Attracted by profits, investment in capital goods increases. Banks expand credit Pessimism and despair of preceding period replaced by all round cautious hope.

Cont.
Prosperity(or Full employment): This stage is characterized by Increased production High capital investment Expansion of bank credit High prices High profit Full employment There is general feeling of optimism among business and industrialist

Cont.
Boom(Overfull employment): The prosperity phase of the business cycle does not end up with a stable state of full employment, it leads to emergence of boom. This stage is characterized by. Rapid expansion in business activities Rapid increase in production Rapid increase in profit Rapid expansion in bank credit

Cont.
Continuity of investment even after the stage of full employment results in inflation and also increase pressure on the factors of production which is already fully employed. Number of jobs exceeds the number of workers( Situation is known as overfull employment) Profit touches new height There is general atmosphere of over optimism

Cont.
But developing boom carries with it the seeds of self distraction. Bottle necks begin to appear in various sectors of the economy. Factors of production become scarce, causing further rise in their prices. The cost calculations of the businessmen and industrialists are completely upset. Some hastily set up firms collapse. This makes the businessmen overcautious. They now begin to stay away from new projects and even stop expansion of the existing units.

Cont.
This prepares the ground for the succeeding stage. A boom, as it is said, is inevitably followed by a bust.

Cont.
Recession: The feeling of over optimism of the earlier period is replaced now by overpessimism characterized by fear and hesitation on the part of the businessman. The other characteristics of this phase are: Failure of some business creates panic among businessmen Banks also get panicky and begin to withdraw loan. Price collapse and confidence is shaken.

Cont.
Decrease in investment leads to increase in unemployment Once recession starts, it goes on gathering momentum and finally assumes the shape of depression. The first phase of the business cycle is complete.

Conclusion
Thus these are five phases of a typical business cycle. It does not, however, imply that every business cycle passes through these five stage in same order. Likewise we can not say anything definite about the duration or length of various stages of the business cycle. However, business cycle provides an important clue about the direction of future movement of economy as a whole and govt. if takes appropriate preventive measures at appropriate time, its unfavorable effect can be minimized.