Business Cycles: Definition and Concept

Business cycles can be defined as recurring and fluctuating levels of economic activity of a country.

In other words, business cycles refer to ups and downs in aggregate economic activity, measured by fluctuations in various macroeconomic variables, such as Gross Domestic Product (GDP), employment, and rate of consumption.

 

“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. 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 degree, unpredictable”-Parkin and Bade.

Generally, an economy experiences business cycles over a long period of time. Earlier, business cycles were thought to be periodic with anticipated durations. However, in recent times, business cycles are widely believed to be irregular features of an economy, varying in frequency, degree, and time interval.

For example, the period of Great Depression in 1930s experienced a decline in economic activity for more than 40 months. However, since World War II, most of the business cycles have persisted for the period of three to five years. A business cycle is characterized by a sequence of five phases, namely, expansion, peak, recession, trough, and recovery. When an economy enters into the expansion phase, there is an increase in various economic factors, such as output, national income employment, prices, and profits.

In addition, in the expansion phase, there is also a rise in the standard of living. After a certain point of time, expansion reaches to its maximum level and economic factors become stable. This situation is termed as the peak phase of a business cycle. Gradually, there is a decline in the economic activities, which marks the beginning of the recession phase of a business cycle. In the recession phase, entrepreneurs become pessimistic about their growth and avoid an)’ type of investments.

In addition, they start slashing costs by laying off people and discontinuing replacement of capital goods. Consequently, the increased rate of unemployment causes a rapid decline in income and aggregate demand. This decline in economic factors reaches a certain limit after which there is no further fall in economic factors.

This is known as the trough phase of a business cycle. In the trough phase, individuals and organizations assume that after a decline in economy there would be expansion thus develop an optimistic approach.

As a result, the economic activities start expanding, which is the starting of the recovery phase. When an economy moves from expansion phase to recovery’ phase, it marks the completion of a business cycle.

Some of the theories are Pure Monetary Theory, Monetary Over-Investment Theory, Schumpeter’s Theory of Innovation, and Keynes Theory Finally, it details upon stabilization policies for controlling business cycles.

Concept of a Business Cycle:

Business cycles, also called trade cycles or economic cycles, refer to perpetual features of the economic environment of a country. In simple words, business cycles can be defined as fluctuations in the economic activities of a country. The economic activities of a country include total output, income level, prices of products and services, employment, and rate of consumption. All these activities are interrelated; if one activity changes, rest of them would also show changes.

These changes in the economic activities together produce a bigger change in the overall economy of a nation. This overall change in an economy is termed as a business cycle. Business cycles are generally regular and periodical in nature.

Some of the management experts have defined business cycles in the following ways:

According to Arthur F. Bums and Wesley C. Mitchel, “Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar characteristics with amplitudes approximating their own.”

According to Parkin and Bade’s, “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. 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 degree, unpredictable.”

According to Keynes, “Trade Cycle is composed of periods of good trade characterized by rising price and low unemployment percentage altering with periods of bad trade characterized by falling price and high unemployment percentage.”

From the aforementioned definitions, business cycles are characterized by boom in one period and collapse in the subsequent period in the economic activities of a country. Business cycles affect the business decisions of organizations to a large extent and set future business trends. For example, the period of boom opens up several investment, production, and credit opportunities for organizations.

On the other hand, period of economic slump reduces business opportunities for organizations. Therefore an organization needs to analyze the economic environment of a country before making any business decisions.