The business cycle is an alternate expansion and contraction in overall business activity, as evidenced by fluctuations in aggregate economic activity such as GNP, industrial production, employment and income.
According to J.M.Keynes “A trade cycle is composed of periods of good trade characterized by rising prices and low unemployment percentages, alternating with periods of bad trade characterized by fall in prices and high unemployment percentages.”
Phases of a Business Cycle: A business cycle will have 5 different phases or stages. They are
3. Expansion or full employment
4. Boom or overfull employment
(1) Depression: During this period business activity in the country will be much below normal level. It is characterized by a short fall in production, mass unemployment, fall in prices, low wages, contraction of credit, a high rate of business failures and an atmosphere of all round pessimism.
(2) Recovery: During this period business activity increases. The industrial production and volume of employment steadily increases. The prices and wages increases. The recovery may take place due to the following reasons:
•New government expenditure
•Exploitation of new sources of energy
•Investment in new areas
•Changes in the techniques of production
(3) Expansion: This stage is characterized by high capital investment in basic industries, expansion of bank credit, high prices, high profits, high rate of formation of new business enterprises and the full employment.
(4) Boom: It is the stage of rapid expansion in business activity resulting in high stocks and commodity prices, high profits and over-full employment. A situation develops in which the no. of jobs exceeds the no. of workers in the market. Such a situation is known as over-full employment. Profits will further increase. This will lead to more investment and in turn further rise in price level and inflation.
(5) Recession: In this stage more business enterprises fail, prices collapse and confidence is shaken. Building construction slows down and unemployment increases. There is fall in income during recession.
Characteristics of Business Cycles
a. Business cycle is a wave like movement.
b. The cyclical fluctuations are recurrent in nature.
c. The upward or downward swing of the business cycle is self reinforcing.
d. Business cycle contains self generating forces.
e. They are all pervasive in their effects.
f. The peak and the trough of business cycles are not symmetrical.
g. In cyclical fluctuations the prices and the production generally rise or fall together.
h. The cyclical upward and downward swings move parallel with production and monetary demand.
i. The cyclical fluctuations are felt more in capital goods industries than in consumer goods industries.
j. They are not periodical in nature.
k. Prices of manufactured goods are comparatively rigid while that of agricultural goods are normally flexible.
l. The cyclical fluctuation tends to be not only national but also international in character.