Economics

Business Cycle – Meaning, Nature And Phases

Various changes occur in the business world from time to time. Sometimes, the business enjoys a situation of high sales and profits but some other times, it suffers from less sales and loss. Moreover, a situation between these two extremes may also exist. Thus, the business activity is subject to cyclical variations. These cyclical variations are called ‘Business Cycles’ if taken together. Generally, a business cycle has four stages namely boom, recession, depression and recovery.

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In a period of boom, the economic activity remains on a high level and an increase is observed in the levels of output, remains on a employment and prices. The second stage is of recession in which the level of business starts declining. This stage leads to the third stage of depression which is characterised by low output, unemployment and falling prices. After some time, the recovery starts and the business activity starts rising again which ultimately leads to a situation of boom.

NATURE/FEATURES OF BUSINESS CYCLE

(1) Business cycles are wave like fluctuations in aggregate economic activity. In this regard, the economy is treated as a whole and fluctuations in a single part of economy can not be called Business cycles.

(2) Business cycles occur in a well organised manner. It implies that these cycles follow a definite pattern. 

(3) The cyclical fluctuations may be recurrent but not periodic in the sense that there is no specific standard duration of a Business cycle.

(4) As we have discussed earlier, business cycles follow a definite period. Generally, this pattern consists of four phases namely expansion,  recession, contraction and revival.

(5) Another important fact about the nature of business cycles is that these are found mainly in the economies where there is a predominance of the private sector.

PHASES OF BUSINESS CYCLE

Phase 1 – Boom/Expansion/Prosperity

(1) There is very high level of output and income.

(2) The situation of full employment is attained.

(3) An increase also takes place in wage, salary, interest rate, taxes etc. along with prices but the increase in these is less as compared to increase in prices.

(4) Profits are high which results into an encouragement to investment.

(5) Production is at a high level and the consumer demand gets increased. are increased.

Phase 2 – Recession

(1) Production and income start decreasing.

(2) The level of employment falls.

(3) Price level and wage also start decreasing.

(4) Profits start falling which discourages investment.

(5) Production starts falling and demand also gets reduced.

Phase 3 – Depression/Contraction/Through

(1) Production and income have a low level.

(2) The unemployment gets increased due to less employment.

(3) The price level is also low.

(4) The volume of profit is low, as a result of which, the inducement to invest also falls.

(5) The pessimism gets increased in enterpreneurs and traders.

Phase 4 – Recovery

(1) A gradual increase takes place in production and income due to a situation of reinvestment.

(2) The employment starts increasing.

(3) The demand for consumer as well as producer goods increases.

(4) The prices start rising.

(5) The volume of profit increases and consequently, investment also increases.

It can be said as conclusion that the above mentioned phases are the foundation of the emergence of business cycles.

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