Business cycle is a major feature of the capitalist or free market economic system. It refers to the regular upward and downward fluctuations in the aggregate economic activities in the economy. These expansions, recessions, contractions and revivals of aggregate economic activities occur and reoccur in an unchanged sequence. In the decade 1930s, great depression was seen in the world that created new revolution in the field of economics. This depression proved 'Say's law of market' wrong because his view, supply creates its own demand did not work. During 2008 /09 AD, also whole world faced the problem of economic recession that started from USA due to failure of real state market.
Meaning of Business Cycle
The regular pattern of expansion and contraction in aggregate economic activities such as economic growth, employment, price level, etc. is called business cycle. It is also known as trade cycle.
In the free market or capitalist economy, aggregate economic variables or macroeconomic variables like national income, employment level, price level, etc. along with their determinant factors keep on changing from time to time.Therefore, various macro economic variables fluctuate up and down, which is the normal phenomena of the free market economy. They are like various waves and tides in the sea, the situation of prosperity and depression keep on occurring in the free market economies. In the situation of prosperity, all macro economic indicators move in the positive direction and in the situation of depression all macroeconomic indicators move in the negative direction.
Characteristics of Business Cycle
Business cycle refers to the alternating periods of expansion and contraction in the aggregate economic activities. These regular and continuous changes in the economy are the features of business cycle. However, not all type of changes can be termed as the business cycle. Only regular and continuous changes come under the business cycle. Based on these facts, the main characteristics of business cycle can be expressed as follows:
1. Cyclical nature:
The nature of business cycle is generally cyclical. It means that there is repetitive and recurrent pattern of ups and downs fluctuations of aggregate economic activities.
2. Regularity:
Some of the economists have given the view that there is regularity or periodicity in the fluctuation of the business cycle. The stages of prosperity and depression occur and complete in fixed period.
3. Economy-wide phenomenon:
A business cycle is an economy-wide phenomenon. When depression sets in the industrial sector, it cannot be restricted there. Soon, it spreads to other sectors like agriculture, business and transport, etc. So is the case during boom.
4. Wave like movement:
A business or business cycle shows a wave-like fluctuation in the economic activities. The expansion or prosperity is followed by a depression and so on.
5. Self-enforcing or cumulative:
Once cyclical movement starts in one direction, it tends to feed on itself. The forces of the economic crisis tend to increase. Once the prosperity phase starts, it tends to run out the control of policy makers.
6. International:
The nature of business cycle becomes international. Business cycle starts from one section of the economy and expands throughout the country. Then, through the international business, it expands from one country to another.
7. Feature of capitalist economy:
Business cycle emerges from the capitalist economy because the government of the capitalist economy does not control each and every sector of the economy. But in the socialist economygovernment has full control over all sector of the economy. Therefore, the influence of business cycle is not seen in such countries as it is seen in the capitalist countries.
8. Unequal effects:
A business cycle affects different sectors of the economy differently. It influences more on capital goods as compared to consumer goods.
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