Business Cycle -BBA TU Note- Bikram Adhikari

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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