Business or Trade Cycles in an Economy: Meaning, Definition and Types

Let us make an in-depth study of Business or Trade Cycle:- 1. Meaning of Business Cycle 2. Definition of Business Cycle 3. Types.

Meaning of Business Cycle or Trade Cycle:

Business Cycle or Trade Cycle refers to the phenomenon of cyclical booms and depression.

In a business cycle there are wave like fluctuations in aggregate employment, income, output and price-level.

It consists of recurring alternation of expansion and contraction in aggregate economic activity.

Definition of Business Cycle or Trade Cycle:

The term business cycle has been defined in various ways by different economists.

The important definitions are as follows:

1. Prof. Haberler has said – “The business cycle in the general sense may be defined as an alternation of period of prosperity and depression of good and bad trade.”

2. In the words of W. C. Mitchell – “Business cycles are a species of fluctuations in the economic activities of organised communities. The adjective ‘business’ restricts the concept of fluctuations in activities which are systematically conducted on a commercial basis. The noun “cycles” bars out fluctuations which do not recur with a measure of regularity. Prof. Mitchell thus insists upon a measure of regularity in cyclical fluctuations.”

3. According to Keynes – “A trade cycle is composed of period of good trade characterised by rising prices and low unemployment percentages, altering with periods of bad trade characterised by falling prices and high unemployment percentages.” Keynes has thus specified two indices, namely prices and unemployment, for measuring the upswing and down swing of the business cycles.

4. In the words of Frederic Benham “A trade cycle may be defined, rather badly as a period of prosperity followed by a period of depression. It is not surprising that economic process should be irregular trade being good at sometime and bad at others.”

In short the business cycle, is an alternate expansion and contraction in overall business activity, as evidenced by fluctuations in measures of aggregate economic activity such as gross product, the index of industrial production and employment and income.

Generally, the cyclical fluctuations have a tendency towards simultaneous appearance in all the branches of the national economy. But sometimes they may be confined only to individual industries or individual sectors of the economy.

Types of Business Cycles:

There are five types of cycles which are as follows:

1. The Minor Cycle:

This is also known as Short Kitchin Cycle. This has gained popularity after the name of the British economist Joseph Kitchin in the year 1923. He made a research and came to this conclusion that a cycle takes place within duration of approximately 30 to 40 months.

2. The Major Cycle:

This has been emphasised as the fluctuation of business activity between successive crises. This is also known as “The Long Jugler Cycle.” A French economist Clement Jugler showed that the periods of prosperity, crisis and liquidation followed each other always within a span of the average of nine and half years.

3. The Very Long Period Cycle:

This is also known as Kondratieff Cycle. This was propounded by N. D. Kondratieff the Russian economist in the year 1925. He has written that there are longer waves of cycles of more than fifty years duration.

4. Kuznets Cycle:

This type of business cycle was propounded by the famous American economist Professor Simon Kuznet. His view was that the secular swing of the cycle generally occurs in between 7 to 11 years and this can show effect within that period.

5. Building Cycles:

Such cycles are associated with the name of two American economists namely Warren and Pearson. They expressed their views in World Prices and the Building Industry book in the year 1937. Their view was that business cycle occurs in the duration of an average of 18 years and the cost of such cycle has major effect on building construction and on the industrial development.