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What is Business Cycle?
A business cycle is a cycle of fluctuations in the gross domestic product (GDP) around its long-term natural growth rate.
From a conceptual point of view, the business cycle is the upward and downward movement of GDP (Gross Domestic Product) and refers to the time of expansions and contractions in the level of economic activity (trade fluctuations) around a growth trend of long term.
Business Cycle Stages
In the diagram above, the straight line in the middle is the constant growth line. The business cycle moves around the line. Below is a more detailed description of each phase of the business cycle:
The first phase of the business cycle is expansion. During this phase, positive economic indicators such as employment, income, production, wages, profits, demand and supply of goods and services increase. Debtors tend to pay their debts on time, the speed of the money supply is high, and investments are high. This process will continue as long as economic conditions are favorable for expansion.
The economy then reaches a saturation point or climax, which is the second stage of the business cycle. Maximum growth limit is reached. Economic indicators have stopped growing and are at their highest level. Prices are at their peak. This phase marks the turning point in the trend of economic growth. Consumers tend to restructure their budgets at this point.
The recession is the stage that follows the peak phase. The demand for goods and services begins to decline rapidly and steadily in this phase. Producers do not notice the drop in demand immediately and continue to produce, leading to an oversupply in the market. Prices tend to go down. As a result, all positive economic indicators, such as income, production, wages, etc., start to fall.
Unemployment increases accordingly. Economic growth continues to decline, and since it is below the constant growth line, the stage is called a depression.
In the depression phase, the economic growth rate turns negative. There is a further decline until factor prices, as well as the demand and supply of goods and services, reach their lowest point. The economy finally bottomed out. It is the negative saturation point of an economy. National income and expenditures are largely depleted.
After this phase, the economy is in a recovery phase. At this stage there is a trend reversal and the economy begins to recover from the negative growth rate. Demand starts to rise due to lower prices and, consequently, so does supply. The economy develops a positive attitude towards investment and employment, and increases production.
Employment is starting to rise and due to accumulated cash balances with bankers, loans are also showing positive signs. In this phase, depreciated capital is replaced by producers, which leads to new investments in the production process.
The recovery will continue until the economy returns to sustained growth levels. Complete a full boom and bust business cycle. The extreme points are the high point and the low point.
Who measures the business cycle?
The National Bureau of Economic Research uses quarterly GDP growth rates to determine the phases of the business cycle and also uses monthly economic indicators such as employment, real personal income, industrial production, and retail sales. It takes time to analyze this data, so the NBER will not inform you of the phase until it has started.8 You can check the indicators yourself to see where we are in the business cycle.
Who manages the economic cycle?
The government manages the business cycle. Lawmakers use fiscal policy to influence the economy. They use expansionary fiscal policies if they want to end a recession, and they should use contractionary fiscal policies to prevent the economy from overheating. However, this rarely happens because they are thrown out of office when taxes are raised or popular shows cut.
The central bank of the nation uses monetary policy. It cuts interest rates to end a contraction or bottom out called expansionary monetary policy. The central bank raises interest rates to manage an expansion so that it does not peak. That is a contractionary monetary policy
Causes of business cycles
The cyclical pattern of changes in the economy is caused by many factors combined. There are internal factors within the economy that can cause these changes. And there are also external factors that can lead to an economy boom or bust. Let’s take a look at all the causes of business cycles.
Internal causes of business cycles
These endogenous factors can cause changes in the stages of the business and the economy in general. Let’s take a look at the internal causes of business cycles.
1] Changes in demand
Keynes economists believe that a change in demand causes a change in economic activity. When demand increases in an economy, companies produce more goods to meet the demand.
There is more production, more employment, more income and higher profits. This will lead to an economic boom. However, excessive demand can also lead to inflation.
On the other hand, when demand falls, so does economic activity. This can lead to bankruptcy which, if held for an extended period of time, can even lead to a downturn in the economy.
2] investment fluctuations
Fluctuations in investment, such as fluctuations in demand, are one of the main causes of business cycles. Investments will fluctuate based on many factors, such as the economy’s interest rate, business interests, profit expectations, etc.
An increase in investment will lead to an increase in economic activity and will lead to expansion. A decrease in investment has the opposite effect and can cause a bottom or even a depression. Apply Business ethics.
3] Macroeconomic policy
The monetary and economic policies of a nation will also lead to changes in the phases of an economic cycle. So when monetary policy tries to expand economic activity by encouraging investment, the economy will skyrocket. On the other hand, if taxes or interest rates go up, there will be a slowdown or recession in the economy.
4] Money supply
There is another belief that business cycles are purely monetary phenomena. So changes in the money supply will cause business cycles. An increase in money on the market will lead to growth and expansion.
However, too much money can also cause adverse inflation. And the decrease in the money supply will cause a recession in the economy. Learn financial management!
External causes of business cycles
In times of war and unrest, economic resources are used to make special goods such as weapons, weapons, and other similar war goods. The focus is shifting from consumer goods and capital goods. This will lead to a decrease in income, employment and economic activity. Then the economy will experience a wartime recession.
And later, after the war, the focus will be on rebuilding. It is necessary to rebuild the infrastructure (houses, roads, bridges, etc.). This will help the economy recover if progress is made. Economic activity will increase as effective demand increases.
2] technological shocks
New and exciting technology is always a boom for business. New technologies mean new investments, more jobs and, as a result, higher income and profits. For example, the invention of the modern cell phone was the reason for a huge boom in the telecommunications industry.
3] Natural factors
Natural disasters such as floods, droughts, hurricanes, etc. they can damage crops and seriously damage the agricultural sector. Food shortages will lead to higher prices and high inflation. Capital goods can also experience a decline in demand.
4] population growth
If population growth gets out of control, it could be a problem for the economy. Basically, the total savings of an economy decrease when population growth is greater than economic growth. Then investment will also fall and the economy will experience depression or slowdown.
To get a full understanding of the business cycle, you have to know what business is, the concepts and characteristics