Business cycle, inflation and deflation

Business cycle

The short-term variations in economic activity are known as business cycles or business fluctuations.

What causes business fluctuation? How can government policies reduce their virulence? Economists were largely unable to answer these questions until 1930’s. At the point, it was the revolutionary theories of J. M. Keynes that pointed to the importance of the Forces of aggregate demand In determining business cycle.

The term business cycle or economic cycle refers to economy-wide fluctuations in production, trade and economic activity in general over several months or years in an economy organized on free-enterprise principles.

The effect of upswing and downswing in economic activity is felt quite intensely because of the ever-increasing business activity and the strong inter-relations between different sector of an economy and between various economies.

During the great depression of 1930’s, the ill effect of the wide swing in business activity was almost devastating. It was also noticed that the great depression there was ‘ no natural recovery ‘ of the economic activity.

Phases/stages of business cycle


A Typical or standard business cycle is characterised by five different stages or phases.{depression, recovery (or revival), prosperity(or full employment), Boom(or overfull employment) and recession.}

These stages of business cycle recur with some sort of regularity and are uniform in case of a different cycle. However, the periodicity of different phases of trade cycle and their time interval difference between cycles. For instance, a cycle may have a periodicity of about 5.5 years in case of advanced nations, while it may be about 8.5 years in case of less developed countries. The time intervals may also differ

 

 

Depression

• Depression 

 It constitutes first Phase a of trade cycle

 


If unchecked, depression is a natural consequence of the recession. The process of falling prices, demand and employment gather momentum. It is a period in which business activity in the country is far below the normal.

It is a period characterized by a sharp reduction of production, mass unemployment, low employment, falling prices, falling profits, low wages, shrinking credit, high rate of business failure, and an atmosphere of all-time round pessimism and despair.

Increase

• Revival/Recovery

This is the phase of revival of demand for goods and services.


Revival period implies an increase in business activity after the lowest point of the depression has been reached. During this stage, there is a slight improvement in economic activity. The pessimism and despair of the preceding period are replaced by an atmosphere of all-around cautious hope.

Prosperity

• Prosperity 

In this period there is a general feeling of optimism among businessmen and industrialist.


This stage is characterized by increased production, high capital investment in basic industries, expansion of bank credit, high price’s, high profits, a high rate of formation of new business enterprises and full employment.

Boom in industry

• Boom(or overfull employment)

This is a phase of rapid expansion in business activity to new high marks, resulting in high Stocks and commodity prices,  high profits and overfull employment.


The prosperity phase of the business cycle does not end up with a stable state of full employment. The peak of prosperity may lead to over-optimism in business psychology resulting in over full employment of resources and raw material, leading, to inflationary rise in prices.

Recession

• Recession 

This is the stage in which over-optimism.

Prices collapse and confidences are rudely shaken, in order words, there is a collapse of confidence.

It is a period that witnesses panic,  fear and hesitation on the part of the businessmen. The failure of some businesses creates panic among the industrialists and businessmen.

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