In: Economics

What is Business Cycle in Economics?

Meaning of business cycle. Phases of business cycle in details.


Expert Solution

Business Cycle 

There have been many ups and downs in economic activity. Many of these ups and downs or fluctuations have occurred due to exogenous factors like wars, famines and other natural calamities. These changes have been abrupt, isolated and discontinuous without any predictability. On the other hand some changes have endogenous. These endogenous changes have been regular, continuous.

       Some of these changes have been confined to some specific fields while others have had a tendency to spread over the entire field of business and affect economic activities. These fluctuations or changes are known as Business Cycle.

Phases of Business Cycle

There are mainly four phasea of business cycle namely-

1- Expansion

2- Recession

3- Depression or contraction 

4- Recovery or revival.

1- Expansion - Boom is the above normal expansion of aggregate economic activity in an economy. The increases in the level of economic activity are not in the nature of X increasing at the cost of Y, they move the whole system upward. They move the entrepreneurs in general to expand their activities and put more resources to the productive process.

2- Recession - The seeds of slump are in the boon itself. By the end of expansion phase when the economy is at the peak of the cycle, there are signals which indicate that the cumulative factors making for expansion are progressively weakening.

3- Depression -  Once the recession persists, it becomes very acute and this is called as a state of depression. Here output and employment levels are very low, real investment is very little, Capital markets are shattered, general prices are also low in this phase.

4- Recovery -  Once depression reaches its lowest point, people and businessman see some opportunity of investment and since capital base is already small, the investment start giving some returns. Since inventory levels are low, there is no pressure to reduce prices. Businessmen see this as a ray of light at the end of a tunnel. This encourages them to take up more investment. The economy is once again on a growth trajectory.

So above are the meaning and phases of Business Cycle in detailed. 

Fluctuations in economics activity is known as business cycle. 

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