Business Cycle/Trade Cycle
Meaning, Definitions, Features, Phases and Theories
Business cycle is the periodic up and down movements in economic activities. It is also know as economic cycle or trade cycle It has been seen that economic activities measured in terms of production, employment and income move in a cyclical manner over a period of time. This cyclic movement is characterized by alternative waves of expansion and contraction, and is associated with alternate periods of prosperity and depression.
According to Parkin and Bade
“The business cycle is the periodic but irregular up-and-down movements in economic activity measured by fluctuations in real GDP and other macroeconomic variables. A business cycle is not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random and, to a large degree, unpredictable”.
According to Arthur F. Burns and Wesley C. Mitchell
Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar characteristics with amplitudes approximating their own.
According to Keynes
“Trade Cycle is composed of periods of good trade characterized by rising price and low unemployment percentage altering with periods of bad trade characterized by falling price and high unemployment percentage.”
Business cycles have three basic characteristics:
These wavelike movements in income and employment occur at intervals of 6 to 12 years. To understand it further you should know that when an economy continues to grow for certain period of time, t is bound to slow down. However, the gap between two cycles is not regular or predictable with certainty. Seasonal variations or random variations are not termed as trade cycles, rather movements which last for longer duration are regarded as trade cycles.
Another very interesting feature of business cycles is that their impact is all embracing i.e. large sections of the economy experience the same phase. It happens because of interdependence of various sectors of the economy. For example, lets suppose due to any reason, aggregate demand for electronic goods declines. This will result in closure of some of the units. This will, on the one hand, create unemployment of employees, and on the other would result in reduction in demand for capital, raw material, intermediary products, marketing agents, advertisers and so on.
Thus contraction of economic activities in one sector would lead to recession in many other areas, and would thus create a chain of less economic activities. This example can be reversed to understand how creation of one new unit would result in multiple increases in activities.
This is one of the most critical features of business cycles. As we have seen that due to interdependence of various sectors and economies, cyclical movements faced by one sector spreads to other sectors in the economy, those faced by one economy spread to other economies as well. Therefore the upward swing of the cycle is reinforced for further upward movement and vice versa.