2. BUSINESS CYCLE
A BUSINESS CYCLE is a fluctuation in the Gross Domestic Product(GDP)
around its long-term natural growth rate.
It explains the expansion and contraction in economic activity that an economy
experiences over time.
A Business cycle is completed when it goes through a single boom and single
contraction in sequence.
3. History:-
The first authority to explore economic cycles as periodically recurring phenomena
was the French physician and statistician Clément Juglar, who in 1860 identified
cycles based on a periodicity of roughly 8 to 11 years.
Clément Juglar (15 October 1819 – 28 February 1905) was a French doctor
and statistician.
Juglar qualified as a doctor in 1846. His medical training gave him an interest
in population and demography, but it appears to have been the economic
disturbances of 1848 that attracted him to the subject of economic fluctuations
and crises. In 1851 he began contributing to the Journal des Économistes, and
in 1860 he submitted an essay, Des Crises commerciales (published as a book,
1862; “Business Crises”), to the Academy of Moral and Political Science; it won
the Bordin Prize.
Juglar was one of the first to analyze business cycles as fully as possible on the
basis of available time series data. His use of statistics in predicting turning
points in cycles was so accurate that a later economic cycle theorist, Joseph
Schumpeter, wrote of him as being “among the greatest economists of all
time.” He paid particular attention to the behaviour of bank balances, which he
regarded as a barometer of commercial affairs.
Clément Juglar
4. • WESLEY CLAIR MITCHELL (AUGUST 5, 1874 – OCTOBER 29, 1948)
WAS AN AMERICAN ECONOMIST KNOWN FOR HIS EMPIRICAL
WORK ON BUSINESS CYCLES AND FOR GUIDING THE NATIONAL
BUREAU OF ECONOMIC RESEARCH IN ITS FIRST DECADES.
• Mitchell was born in Rushville, Illinois, the second child and oldest son of a Civil
War army doctor turned farmer. In a family with seven children and a disabled
father with an appetite for business ventures "verging on rashness" a lot of
responsibility fell on the oldest son. Despite these challenges, Wesley Clair went
to study at the University of Chicago and was awarded a PhD in 1899.[3]
• Mitchell's career as a researcher and teacher took the following course:
instructor in economics at Chicago (1899–1903), assistant professor (1903–08)
and professor (1909–12) of economics at the University of California, Berkeley,
visiting lecturer at Harvard University (1908–09), lecturer (1913) and full
professor (1914–44) at Columbia University. In 1916 he was elected as
a Fellow of the American Statistical Association.[4]
• He was one of the founders of the New School for Social Research, where he
taught for a time between 1919 and 1922, and of the National Bureau of
Economic Research (1920), where he was director of research until 1945.
Wesley Clair Mitchell
5. ARTHUR F. BURNS
• Arthur Frank Burns (August 27, 1904 – June 26, 1987)
was an American economist. His career alternated between
academia and government. From 1927 to the 1970s, Burns
taught and researched at Rutgers University, Columbia
University, and the National Bureau of Economic
Research.[1]
• Burns was the chairman of the U.S. Council of Economic
Advisors from 1953 to 1956 under Dwight D.
Eisenhower's presidency. In 1969, he originated the post of
Counselor to the President, under Richard Nixon. He
served as the Chairman of the Federal Reserve from 1970
to 1978 and as Ambassador to West Germany from 1981 to
1985.
Arthur F. Burns
7. CAUSES OF BUSINESS CYCLE
Interest rates
Fluctuation in Investments
Macroeconomic policies
Supply of Money
Technology Shocks
Natural factors
Population Expansion
8. INSTRUMENT TO CONTROL BUSINESS CYCLE :-
There are mainly 3 measures are:-
1.Monetary Policy.
2.Fiscal Policy.
3.Direct Controls.
9. Monetary Policy:-
It mainly concerned with Money Supply and Bank Credit and Interest rates.
It is a Method to Control Business fluctuations operated by Central Bank of Country.
Monetary Policies Chosen methods of credit control such as:
1.Bank rate
2.Reserve ratio
3.Open-market operations etc…
Monetary inflation, leading to higher income and profits, strengthens the boom conditions. Similarly,
Monetary deflation reinforces the downswing in the economic activities leading to depression. So, the
Monetary policy should be adopted in an anti-cyclical way.
To control a recession or depression, the central bank follows an easy or cheap monetary policy by
increasing the reserves of commercial banks. It reduces the bank rate and interest rates of banks.
10. Fiscal Policy:-
Monetary policy alone is not capable of controlling Business Cycle.
It is highly effective for controlling excessive Government expenditure, Personal consumption expenditure.
(Boom)
On the other hand it helps in increasing in Government expenditure, Personal consumption expenditure.
(Depression)
spending, and
taxation,
borrowing..
These three instruments have to be effectively utilized to control the severity of boom or the difficulties of depression.
During the periods of recession and depression, the government should reduce substantially the taxes and leave more
money in the pockets of individuals for spending and investment.
11. Direct Controls:-
The aim of direct controls is to ensure proper allocation of resources for the purpose of price stability.
They are meant to affect strategic points of the economy.
They affect particular consumers and producers.
They are in the form of rationing licensing, price and wage controls, export duties, exchange controls,
quotas, monopoly control, etc.
They are more effective in overcoming shortages arising from inflationary pressures.
Their point of success mainly depends upon the existence of an efficient and honest administration. They
are mostly used in emergencies like war, crop failures and in hyper inflation.
12. Some More:-
Price control : To control inflation or rising prices, price control measures should be introduced. That means prices must he kept under
check.
Price support : During the period of depression prices begin t fall. This has cumulative effect. So it is harmful. To avoid this, price
support policy should be adopted. Minimum prices should be provided. If prices fall below a minimum level, government purchases all
the goods at support prices in the market.
Socialistic measures: Socialists recommended replacement or capitalist economy by a socialistic system of production and distribution.
When this is done, there would be a completely planned economy and all fears of over-investment and over production would be brought
to an end.
Reduction of economic inequalities : Inequalities of income should be reduced. This can be done by raising the wage levels and
ensuring more equitable distribution of national income by increased taxation. This will reduce inequalities in the distribution of income
and wealth and thereby will remove the “under consumption tendency.
State control over investment : The government should control private investment in order to prevent over improvement and thereby
the boom.
Price Adjustment Policy: Those who regard market price variations as major causes of instability advocate a policy of encouraging
price flexibility as one of the important weapons of stabilisation. They argue that it would curb profit inflation reduce the duration of
recessions and inflation by reducing the disparities between controlled and uncontrolled prices.
.
13. Continued
• Automatic Stabilisers :In this case the economists have suggested the introduction of a number of automatic stabilisers or (built
in stabilisers) to deal with the business cycle. An automatic stabiliser or (built-in-stabiliser) is an economic stock-absorber that
helps smooth the cyclical business fluctuations of its own accord, without requiring deliberate action on the part of the
government.
• International Measures Control of Business Cycle:- Today, every country has trade relations with the rest of the world. If there is
inflation or deflation in one country, it can be easily carried to other countries. The example of great depression can be given. Business cycle is an
international phenomenon and it should be tackled on international level. Different measures to control business cycle fluctuations have been suggested
by some well-known economists these are:
1.Control of International Production
2.International Bill Stock Control
3.International Investment Control
• Reorganization of Economic System:- some economists suggest that there should be complete reorganization of the whole economic
system to control of business cycle fluctuation. The capitalistic system of production should be replaced by the socialistic system of production. In
socialistic economy, there are few chances of cyclic fluctuations. In 1930, when all capitalist countries of the world were suffering from depression, it was
only socialist countries which were free from such crisis.
Anti-cyclical budgeting
• Anti –Cycling Budgeting:- The budgetary policy of the government should be in tune with the measures already indicated to combat
the instability created by business cycle. During times of depression, a policy of deficit budgeting should be adopted. This will increase
the flow of income in the economy. During upswing, surplus budgeting should be adopted. Thus, the budgeting should be done in anti-
cyclical method.
14. Conclusion:-
• In the end it can be said that there is no single method which can control
cyclical fluctuations.
• Therefore, it can be suggested that all methods be used simultaneously.
• Because monetary policy is easy to apply but it is less effective.
• Next, the fiscal measures are effective and better than monetary method but it is
difficult to control and operate.
• Therefore, it can be a point to study that the right remedy for the trade cycles
has not been found as yet.
