Business cycle: description, stages and steps, examples

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:41

Many processes in human life occur cyclically. The economy is no exception. The market environment is constantly changing under the influence of various factors. Economic growth is replaced by stagnation and crisis. Then the process is repeated again. Scientists identify business cycles, considering their stages, causes and consequences. This allows you to harmonize the situation in the market. What constitutes a business economic cycle will be discussed later.

Recurrence concept

The theory of business cycles has been studied by many famous economists. Over the past two thousand years, various assumptions have been put forward about the causes of their occurrence. The first research in this direction was carried out by scientists of ancient Greece. They used generalization methods to track certain processes. The accumulated knowledge allowed them to determine that development occurs in cycles. It is observed not only in the economy, but also in nature, politics, the social sphere and others.

Before, the cycle was represented as a circle. In this case, the processes, according to ancient scientists, are identical. Therefore, they believed that the same phases always repeat themselves. However, over time it has been confirmed that this is not the case. Development takes place in a spiral.

The theory of political, business cycles was considered by ancient scientists from different angles. As a result, they concluded that the process has an undulating motion. Crises and rises replace each other successively. The observations of ancient philosophers first began to be considered seriously only at the beginning of the last century. The reason for this was upheavals in society, ideals and science. This forced scientists to look for reasons for such phenomena. As a result, they considered the mechanism of cyclicity.

As a result, researchers came to the conclusion that the world is developing unevenly. This was the beginning of a new worldview.

Modern approaches to the study of theory

The political and business cycles are considered in depth by scientists of our time. These questions never lose their relevance. This is necessary for strategic and ongoing planning. If a company, organization or a whole state can predict the features of the further development of its environment, this allows you to make the right decisions that are most beneficial from an economic point of view. This allows you to win in the competition, to occupy the most advantageous position in the market. Knowing how it will develop, the company can reduce negative trends, getmaximum benefit in the current situation.

The concept of business cycles is the property of the total modern science. Scholars have yet to come to a consensus. They have many points of view on these issues. No theory, however, can be called ideal. Most researchers agree that business cycles are continuous and consistent. There are certain stages in this process. With certain political interventions, some of them may practically drop out of the general process. They pass in a short period of time, remaining invisible.

Today, cyclic processes are recognized by almost all scientists. Crises, ups and downs follow each other. They don't happen by accident. But the essence of the cycle causes serious discussions among researchers. The concepts that attempt to explain such concepts are manifold. Research in this direction does not stop to this day.

Definition

It is worth considering in more detail the essence of economic cycles. The business cycle has several characteristic features. This is a periodically changing activity in one or more sectors of the economy. For a period with a certain duration, several phases change. These are the ups and downs that are observed not only in a separate market, but also within the whole state or the world. Fluctuations cannot be characterized by regularity. This does not allow predicting the market situation accurately. For this reason, the concept of cycles is considered conditionally in modern economics.

The duration of each stage is different. Their nature is also heterogeneous. But common features can still be distinguished from all. Real business cycles have the following characteristics:

1. In all countries with a market economy, fluctuations in the process of reproduction are determined.
2. Crises cannot be avoided. They have negative consequences for the economy. But they are also needed for further development.
3. The same stages stand out in each business economic or political cycle. Each phase proceeds sequentially.
4. There are many reasons that cause fluctuations. They have different traits.
5. The global economy has a significant impact on the nature of the cyclicality of individual markets. If a crisis occurs in one country, it will affect the economic situation of other countries.

Reason for cyclical economy

Business cycles happen for a variety of reasons. Knowing what causes fluctuations, you can make a forecast. The main factors that provoke cyclical fluctuations are the following facts:

1. Shock economic impulses. They influence the market environment, changing the course of its development. This, for example, can be innovative discoveries, the development of new technologies. It makes a breakthrough. War is another shock to the economy.
2. Investment of revolving funds. With the wrong approach, materials and raw materials begin to accumulate in production. This leads to the accumulation of stocks, goods, capital appliedirrationally. Turnover slows down, involving more and more resources. Production suffers from this, as capital accumulates in goods, stocks.
3. The prices of raw materials used in production are changing. Because of this, its deficiency may be observed.
4. Seasonal fluctuations. For example, in agriculture, this situation is considered normal. Such fluctuations are expected.
5. Actions of trade union committees. Workers in some situations refuse to fulfill their duties, as they defend their rights. At the same time, trade unions demand higher labor standards, wages, and guarantees for workers.

For this reason, development occurs in waves. Oscillations occur, which are characterized by different amplitudes.

Graphic

There are certain phases of the business cycle. They are depicted using a graphical method, building a graph. It reflects the level of GDP, which is a wavy line. The abscissa shows time, and the ordinate shows GDP. If we consider the curve to scale, it gradually rises up. It also proves the spiraling development of the economy.

There are 4 phases of the economic cycle. This is:

1. Rise.
2. Peak.
3. Recession.
4. Bottom.

Other concepts do not apply to the phases of the business cycle. When the rise comes, the curve passes the stage of the bottom. This phase lasts until the peak point. At this time, the pace of production begins to increase. This isentails an increase in the wages of workers. The staff is starting to expand. As the number of unemployed decreases, the population has more money. Purchasing power increases along with the demand for products.

At the recovery stage, inflation gradually decreases. Since the population has money, production is increasing. Companies have funds to develop innovative approaches and technologies. At the stage of recovery, such projects pay off. This is a period of development. Enterprises receive loans from banks, investors begin to invest in production.

Rise and fall

Considering the phases of the business cycle, one should note such a stage as a peak. This is the highest point. That is, in it the economy reaches its apogee within the framework of this cycle. Business activity reaches the highest level. At this time, the lowest unemployment rate is observed. It may be absent altogether. Production works at the highest possible level.

At the peak of business activity, inflation begins to gradually increase. This process is triggered by the saturation of the market with goods. The competition is gradually getting stronger. This forces companies to develop more stringent measures to promote their products. This requires long-term loans. It's getting harder and harder to pay them off. Because of this, financial indicators begin to decline. Therefore, banks and investors provide their capital only to the most promising companies. The risks are starting to rise. SomeCompanies can't keep up with the growing competition. They are starting to drop out of the fight, eliminating some of the production processes.

At this point, the decline phase begins. Some workers are subject to layoffs. This leads to a decrease in purchasing power. Inflation is gradually increasing, growing at an increasing pace.

There are a lot of goods, but the demand for them is decreasing. Only the strongest organizations can survive in such conditions. Many organizations become unable to pay their debts. They are liquidated, which entails new waves of layoffs. Product prices are falling. Production declines.

Bottom

Every business cycle reaches its lowest point sooner or later. It's called the bottom. The unemployment rate is at its highest during this time. The surplus of goods is reduced. By this time they are either sold at reduced prices or liquidated. Some items deteriorate and need to be disposed of. Warehouses in production are empty.

At the lowest point of the curve, prices stop falling. Then the movement turns up. But trading at this point in the cycle is still at its lowest point. Capital is returned back to investors and creditors. Debt levels are falling, companies can only rely on their own resources.

For this reason, the level of risk is reduced as much as possible. Those organizations that have continued to operate become attractive to investors. Interest on loans is declining, which opens up new prospects for production. Companies get loanshire workers, the population begins to increase the amount of money.

At the bottom point, business activity does not stay long. However, without proper management, it can drag on for years. Such cases have taken place in history.

Common paradigms

There are different patterns of business cycles. They interpret the occurrence of fluctuations in market activity from different angles. The most common ones are:

1. Model of multiplier-accelerator. This approach assumes that cycles reproduce themselves. Once the wobble has occurred, it will continue like a seesaw. This model is not suitable for explaining real cycles.
2. Mechanism of impulse-propagation. Random shocks, shocks rock the economy. They affect supply and demand, can cause both an increase and a decline in production.
3. Monetary concept. This model explains the occurrence of cyclicity not by changes in supply and demand, but by some processes in the monetary sector. Banks offer to borrow money. This is a money offer. Investment increases, which affects aggregate demand.

An example of an evolutionary model

One of the new models that explains fluctuations in the business cycle is evolutionary theory. It needs to be seen with an example. Thus, supporters of this theory argue that cyclical processes are caused by a change in production generations. This is easy to imagine in the case of communication companies.

So, in the last centurycompanies that manufactured landline telephones were actively developing. At the time of their greatest development, there was a peak in this industry, which affected the economy as a whole. Over time, the market is saturated with these products. Next, wireless mobile phones were invented. Landline phone companies have begun to close or change operations.

A new generation of mobile phone companies sparked an economic boom.

Modern momentum

In a real market environment, the modern business cycle has certain distinctive features. It is controlled by the state. It pursues an anti-crisis policy, which leads to a reduction in negative consequences for the economy. Modern cycles have been somewhat reduced. They only last 3-4 years. The sharp boundaries between the phases have disappeared due to the regulation of processes by the government. Therefore, each stage smoothly replaces one another.

Since the same phases of the cycle are repeated in the economies of different countries, this enhances the negative effect. Crises are becoming global, affecting the world market. Therefore, the approach to regulation should take place at the highest level.