The Business Cycles as a Form of Economic Development
The Business Cycles as a Form of Economic Development
of Education and Science of Ukraine
Technical University of Ukraine
of Management and Marketing
«The Business Cycles as a
Form of Economic Development»
The student of UZ-92
Ereshko Yu. A.
busines economic cycle
Definition of Cyclicity
Stages of the Business Cycles
Causes of Economic Cycles
Types and Continuity of the Business Cycles
Middle Term Cycles
Long Cycles (The Kondratiev wave)
Stabilizing policy of the
The Great Depression
The List of Used
The modern society strives to continuously
improve the level of life and living conditions, which can only provide
sustainable economic growth. However, long-term economic growth is not even, but is
constantly being interrupted by periods of the economic instability. The ups
and downs along the level of output, following one another, are commonly called
the business or economic cycles.
We can meet cycles, including economic ones,
almost everywhere. Our life, the career develops cyclically - we always
feel expansions, recessions. The
topic is relevant because we all have to understand that once we hit the pick,
it’s going to be followed by the recession.
Definition of Cyclicity
The economy has the ability to develop
cyclically: it has its own crises, recoveries, "booms". People always
strive to reach the peak, the "boom" of their welfare; the government
- to the peak of economic development of the state. But the
economy can’t stay at the peak of its development forever, it’s always followed
by the recession, crisis. Under these two words we all understand something bad,
something we want quickly to get rid of. Crises
have a negative impact on almost everything, so we try to avoid it. But even
in the developed countries like USA, UK, France, Germany and other countries of
Western Europe we don’t see the successful experience of avoiding them.
Scientists have not
determined the exact causes of the cycles for several centuries. Currently,
there are only theories of economic cycles. The other economists agree with
them or offer brand new ideas on the problem .However, this question remains open to this day.
Economic cycle (or the business cycle) – is the periodic
but irregular up-and-down movements in economic activity, measured by
fluctuations in real GDP and other
The main characteristics of business cycles:
Wave-looking dynamics of macroeconomics factors.
The economic cycles depend on output. The output is expressed by the
quantity of commodities and services, produced by the economy of the exact
Stages of the
The full business cycles have four stages it’s gone through. They are:
recession, through, recovery and peak (or “boom”).
At the moment of recession there is a
decline in economic growth, and then, as a rule, direct reduction in output. These phenomena are associated with the overproduction
of goods. At this time, the amount of unsold
goods dramatically increases. We can
see massive bankruptcy (ruin), industrial and commercial enterprises which can
not sell goods that are accumulated. Because of the suspension of production,
the unemployment is rapidly growing, wages are declining. The stock
market is crushed, we observe falling stock prices. All
entrepreneurs are in dire need of money to pay debts quickly formed and
therefore the norm of banks-sky percentage will increase significantly.
Here are the longest recessions of the last century:
1929-33: 43 months
1910-12: 24 months
1913-14: 23 months
1920-21: 18 months
1973-75: 16 months
1980-81: 16 months
As we can see the longest recession happened
during the Great Depression (1929-33). It lasted 43 months.
Following the recession here comes another
phase – trough (depression). The declining of production suspends and the prices are
getting lower. Stocks of goods are gradually decreasing. Because
of the small demand, mass of free capital increases, the bank interest rate
reduces to a minimum level. Industry and employment, having got to the lowest level,
slowly and gradually begin to grow.
During the depression the supply of goods stops
to dominate on demand, that’s why an economic equilibrium appears between them.
At the same time conditions to end the crisis are being naturally created.
Speaking of through, let’s get back to the
Great Depression. For instance, stock prices fell from $89 to 15$ billion. An
unemployment rate was 25%. 100 000 failed.
The stage of recovery is the most pleasant
phase of any cycle.
The economic conditions which we have described in depression
phase do not remain as such for ever. After sometime revival or recovery sets
in under the influence of a variety of factors. The revival phase develops when
the accumulated stock of commodities with the businessmen are exhausted. The
cost under the impact prolonged depression begins to fall. The price which have
reached its lowest level stop falling further.
There is then complete harmony between costs and price
relationship. When profits begin to reappear, the businessmen are induced to
invest their hoarded money in some enterprise. In order to steal a march over
other industrialists, they start repairs, renewal and replacements of their
capital equipments and stocks. The capital goods industries resume activities.
There is gradual reemployment of labor.
The money incomes begin to increase and the effective demand
is revived. The government also tries to break the spell of depression by
starting construction or expanding some public works with a view to give more employment. The
commercial banks which have accumulated large reserve offer credit on favorable
terms. The marginal efficiency of capital begins to rise and investment opportunitiesbrighten
up. The consumers start buying commodities to avoid the rise. Due to increase
in demand for commodities, investment in various industries is stimulated and
thus the revival takes place.
In the Great Depression recovery real GDP raised from $580
billion to $1300 billion.
Recovery ends with a "boom" or peak of cycle when
the economy is operating at maximum capacity, there is full employment,
investment and spending of customers are very high, we observe an expansion of
production, wages and profits are rising. Now because of many customers who are
willing to buy a lot of commodities, prices trend to rise. Entrepreneurs feel
limitation of recourses and an output level stops going up. Then the economy is
"overheated", and it sinks into a new crisis.
The cycle is completed. And here comes a new one.
Of course, the way how business cycles go depends on each
situation of different countries. In some of them recessions take no more then
a year, but others stay in that phase for 5-10 years. It also depends on what
caused the recession.
Causes of the Business Cycles
A lot of economists have conducted
researches on what causes the business cycles to take place. Even though we
don’t have an actual answer to that question. There are about 200 concepts that
will describe economic crisis and their cyclicity. All of those concepts are
divided into two groups.
At first, the nature of economic cycles is
explained by the factors not having anything in common with economic system. They
are: political events, psychological problems, solar activity cycles, wars,
revolutions, the powerful breakthroughs in techniques and technology.
In particular. One Englishman explains it
through the solar activity. An American, G. Moor, was talking about Venus
Secondly, the cycle is considered as an
internal phenomenon, dealing with economics. Internal
factors can cause a recession, and the rise in economic activity through
certain periods of time. One of the crucial factors is the cyclicity of basic
capital. In particular, the beginning of economic boom,
accompanied by a sharp increase in demand for machinery and equipment,
apparently suggesting that it repeated over a period of time when this
technique is physically and mentally worn out.
So, generally there are two types of causes.
They are internal and external cause.
political and other
Continuity of the Business Cycles
Short business cycle(Kitchin
This cycle is
believed to be accounted for by time lags in
affecting the decision making of commercial firms. Firms react to the
improvement of commercial situation through the increase in output through the
full employment of the extent fixed capital assets. As a
result, within a certain period of time the market gets ‘flooded’ with
commodities whose quantity becomes gradually excessive. The demand declines, prices drop, the produced commodities get
accumulated in inventories, which informs entrepreneurs of the necessity to
reduce output. However, this process takes some time. It takes some time for
the information that the supply exceeds significantly the demand to get to the
businessmen. Further it takes entrepreneurs some
time to check this information and to make the decision to reduce production,
some time is also necessary to materialize this decision (these are the time
lags that generate the Kitchin cycles). Another relevant time lag is the lag
between the materialization of the above mentioned decision (causing the
capital assets to work well below the level of their full employment) and the
decrease of the excessive amounts of commodities accumulated in inventories.
Yet, after this decrease takes place one can observe the conditions for a new
phase of growth of demand, prices,
Juglar was one of the first to develop an
economic theory of business
cycles. He identified the 7-11 year fixed investment cycle that is
now associated with his name. Within the Juglar cycle one can observe
oscillations of investments into fixed capital and not just changes in the
level of employment of the fixed capital (and respective changes in
inventories), as is observed with respect to Kitchin cycles. The
recent research employing spectral analysis has
confirmed the presence of Juglar cycles in the world GDP dynamics up to the
(The Kondratiev wave)
The cycle is
supposedly more visible in international production data than in individual
national economies. It affects all the sectors of an economy, and concerns
mainly output rather than prices. According to Kondratieff, the ascendant phase
is characterized by an increase in prices and low interest rates, while the
other phase consists of a decrease in prices and high interest rates.
identified three phases in the cycle: expansion, stagnation, recession. More
common today is the division into four periods with a turning point (collapse)
between the first and second phases.
A fourth cycle may
have roughly coincided with the Cold War:
beginning in 1949, turning with the economic peak of the mid-1960s and the Vietnam War escalation,
hitting a trough in 1982 amidst growing predictions in the United States of
worldwide Soviet domination and ending with the fall of the Berlin Wall in 1989.
The current cycle most likely peaked in 1999 with a possible “winter”
phase beginning in late 2008. The Austrian-school economists
point out that extreme
price inflation in the absence of economic growth is a form of
allowing either stagflation
or deflation to represent
a recession or depression phase of the Kondratieff theory.
Stabilizing policy of the State
The main goal of the stabilizing policy is
to reduce the wave hesitance. There are two types of policies like this.
The Policy of containment.
This is an activity to reduce the demand.
Government uses it at the stage of peak. At this moment the demand is growing
that’s why entrepreneurs are striving to rise the prices and expand the
production. And this causes the inflation potential. At this point the economy
needs to be “cooled”. Apparently, the government wants to raise taxes, reduce
state budget spendings, to raise interest rates.
This policy is good to fight against inflation, but it also
causes a problem of unemployment.
The Policy of Expansion
This is exact opposite policy - it’s aimed
to expand the demand. This is relevant when the country is in a stage of
through. Stimulating spendings, government tries to make the production
flourish. They want to raise the output level.
Main instruments are: decreasing interest
rate, rising wages, stimulating investments.
The Policy of Expansion creates conditions
for economic growth and lowers the unemployment rate but at the same time it
threats by rising prices which can lead to inflation.
The Great Depression
Historians most often attribute the start of
the Great Depression to the sudden and total collapse of US stock market prices
on October 29, 1929, known as Black Tuesday. However,
some dispute this conclusion, and see the stock crash as a symptom, rather than
a cause of the Great Depression. Even after the Wall Street Crash of 1929, optimism persisted for
some time; John
D. Rockefeller said that "These are days when many are discouraged.
In the 93 years of my life, depressions have come and gone. Prosperity has
always returned and will again." The stock market turned upward in early
1930, returning to early 1929 levels by April, though still almost 30% below
the peak of September 1929. Together, government and business actually spent
more in the first half of 1930 than in the corresponding period of the previous
year. But consumers, many of whom had suffered severe losses in the stock
market the previous year, cut back their expenditures by ten percent, and a
severe drought ravaged the agricultural heartland of the USA beginning in the
summer of 1930.
By mid-1930, interest rates had dropped to
low levels, but expected deflationand
the reluctance of people to add new debt by borrowing, meant that consumer
spending and investment were depressed. In May 1930, automobile sales had
declined to below the levels of 1928. Prices in general began to decline, but
wages held steady in 1930; but then a deflationary started in 1931. Conditions
were worse in farming areas, where commodity prices plunged, and in mining and logging
areas, where unemployment was high and there were few other jobs. The decline
in the US economy was the factor that pulled down most other
countries at first, then internal weaknesses or strengths in each country made
conditions worse or better. Frantic attempts to shore up the economies of
individual nations through protectionist
policies, such as the 1930 U.S. Smoot–Hawley Tariff Act and retaliatory tariffs in other
countries, exacerbated the collapse in global trade. By late in 1930, a steady
decline set in which reached bottom by March 1933.
US Unemployment rate
The List of Used Literature
П.В. Круш, С.О. Тульчинская
“Principles of Macroeconomics”
Kitchin, Joseph "Cycles and Trends in Economic Factors",