The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long- term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth ( boom), and periods of relative stagnation or decline (recession).
Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite being termed cycles, these fluctuations in economic activity do not follow a mechanical or predictable periodic pattern
Stages of Business Cycle Boom Depression or contraction. Recession Recovery or expansion.
Duration of Business Cycle Minor cycle – 1 to 3 years Major Cycle – 8 to 10 years Very Long Cycle – 50 – 60 years
Climate Theory This theory divides into: Good weather Bad weather Example:When all the parameters of the business cycle are on higher level, it’s a good weather. And if all the parameters start sliding down, the weather is said to be bad.
Psychological Theory This theory divides into: Pessimist mindset. Optimist mindset. Example:When the mood of the market is positive and based on the parameters the growth is higher, its optimistic mindset. On the other hand when the mood is negative and expectations are low the mindset is pessimistic.
Innovation Theory New invention (More profit) Innovation (50) – earlier (450) – following Result depression
Under consumption theory / Under saving This theory is derived from demand, When the supply is more and demand is less, it is under consumption and leads to stock piling which in turn reduces the prices and brings in the recession.
Over investment theory This theory has the base as investment,If the investment required is 5 lakhs and invested is 8 lakhs, the return of investment will be lower. Leading to recession.
Purely monetary policy Based on money supplyMarket supply is high – everything upwardsMarket supply is downwards – depression
Keynesian Theory Based on marginal efficiency of capital (MEC) More MEC (+) you must invest in your business , economy is towards boom. Less MEC (-) Depression.
Parameters of Business cyclePhase Boom Depression Recession RecoveryEmploymentOutputWagesPricesInterestBank creditCost ofproductionStockFeeling ofindustry