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Business Cycles
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Business cycle or economic cycle
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. In other words, a business cycle or an economic cycle refers to economy-wide
fluctuations in economic activity (including production of goods and services), over several months or years. Such cycle pass
through phases of prosperity and depression. A business cycle is not predictable, regular or repetitive. Its timing is random and
unpredictable. The business cycles influence the business decisions and lead to impact on individual firms and the economy as a
whole. Characteristics of a business cycle: It is synchronic : The upward or downward movement tend to occur almost at the same
time, in all industries. Prosperity or depression in one industry will have impact in other industries, almost immediately. It shows a
wave-like movement : The period of boom and depression comes alternatively. Cyclical fluctuations are recurring in nature:
Various phases are repeated. A boom is followed by depression which is followed by prosperity again.
Downward movements are more sudden, than the upward movements There is no indefinite depression or boom period. Phases
of a business cycle A business cycle has 4 phases namely (i) Boom (2) Recession (3) Depression (4) recovery
1.Boom : Production capacity is fully used. Products fetch more than normal price giving higher profits. This attracts more
investors. Increasing use of factors of production leads to increased cost of production. The fixed income groups find it difficult to
cope with the increase in prices. They are forced to reduce their consumption which leads to lower demand, which results in
recession.
2.Recession : In economics, a recession is a business activity contraction, a general slowdown in economic activity over a period
of time. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic
Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation all fall
during recessions; while bankruptcies and the unemployment rate rise.
Recessions are generally believed to be caused by a widespread drop in spending.
Govt. policy in recession : Governments usually respond to 'recessions by adopting expansionary macroeconomic policies, such
as increasing money supply, increasing government spending and decreasing taxation.
3.Depression : In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is
a more severe downturn than a recession. A rare and extreme form of recession, a depression is characterized by its length, and
by abnormally large increases in unemployment, falls in the availability of credit— quite often due to some kind of banking/financial
crisis, shrinking output and investment, numerous bankruptcies— including sovereign debt defaults, significantly reduced amounts
of trade and commerce— especially international, as well as highly volatile relative currency value fluctuations— most often due to
devaluations.Common elements of depression : Price deflation, financial crisis and bank failures.
4. Recovery : The depression phase does not continue indefinitely. The retrenched workers offer their services at lower wages.
Prices.are,at,the -lowest level. Hence consumers start purchasing. Banks having surplus funds, startiending at low interest rates.
With increase in demand, the piled up stock get exhaust. The economic activity starts again. Increased incomes lead to increasing
demand, increasing production, investment, employment.
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