Business Cycle

It refers to phenomenon of cyclical booms and

depressions. According to Keynes “ A trade cycle is
composed of periods of good trade characterised by
rising prices and low unemployment percentages,
altering with periods of bad trade characterised by
falling prices and high unemployment percentages.
Phases of a Business cycle

 Recovery or Expansion Phase: This phase starts after

depression has lasted for some time and due to either
exogenous or endogenous forces revival starts. This phase is
characterised by steadily increase in level of employment,
income and output.
 Prosperity: Demand, output, employment and income are at a
high level. They tend to raise prices but wages and salaries do
not rise to that extent as a result profit margin rises.larger
profit expectations further rises investment. This peak may
lead to over full employment in the economy and inflationary
rise in prices. It is a symptom of the end of prosperity phase.
Phases………
 Recession: Downward descend from the peak which
is of short duration. Its signs are liquidation in the
stock market, strain in the banking system,
liquidation of bank loans, and decline of prices. As a
result of this profit margins decline further.
Investment, employment, incomes and demand
declines.
 Depression: General declines in economic
activity.Considerable reduction in the production,
employment, income, demand and prices.Bank rate
falls considerably.
Hawtrey’s Monetary theory of Business cycle

 According to him trade cycle is purely a monetary

phenomenon as non monetary factors such as droughts and
floods cause only a partial depression.
 Cyclical fluctuations are at the best caused by the contraction
and expansion of credit by the banks which in turn leads to
increase or decrease in the flow of monetary demand on the
part of producers and traders.
 Recovery phase starts when the bank expand the credit
facilities.
 Demand on the part of producers will ultimately lead to the
conditions of boom.
 Boom period continue only for some time and it comes to an
end when money with the bank is exhausted.
 From this point recession starts. People start repaying bank
loans by selling their stocks and liquidating their assets.
 Thus money with the bank increases and that with the public
reduces.
 This starts depression in the economy.
Schumpeter’s Theory of innovations
 He believes that innovation is the source of
economic fluctuations. Trade cycles are the outcome
of economic development in a capitalist society.
 There are two stages in this model.
 The first stage deals with the initial impact of
innovation and the second stage follows through
reactions to the original impact of innovation.
 In the first stage every factor is fully employed and
producing efficiently. There are no savings and
investment. This equilibrium is called as circular flow
by Schumpeter.
 This circular flow is broken by Innovation in the
form of product, new method of production, new
market, new source of material or new method of
managing industry by an entrepreneur.
•The first stage consists of a two phase cycle.

•The second stage consists of a four phase cycle.