Business Cycle

Business cycle can be defined as the periodic fluctuations measured in terms of prices, GDP, levels of employment and production in the general rate of economic actions. Irregularity and unpredictability are the two major characteristics of business cycle. The following are the four phases of business cycle:

Contraction

Trough

Expansion

Peak

Contraction refers to a reduction in the pace with which economic activity is conducted. If this contraction is very severe, it is known as recession. The turning point in the cycle of business where a contraction changes into expansion is known as trough. If the trough is a deep one, it is referred to as depression. Expansion refers to an increase in the speed of economic activities. The upper turning point of business cycle is known as a peak. Profit and sales are maximum at the time of expansion. Businesses can not logically hold on to this crescendo and a process of general slowing down results in contraction.

In the long run, various economic activities tend to waver. These fluctuations are referred to as economic cycle or business cycle. Within this cycle, there are periods of decline in stagnation of output and there are periods of rapid increase in output. Real Gross Domestic Product or GDP is used to measure these fluctuations. The following are the types of business cycles:

• The Kondratieff wave or cycle
• The Kuznets infrastructural investment cycle
• The Juglar fixed investment cycle
• The Kitchin inventory cycle
• The political business cycle
• The partisan business cycle

Over the past few years, economic theories have laid greater stress on economic fluctuations rather than on business cycles. According to the theory of rational expectations, an economy does strive to be in a state as close to equilibrium as possible. The theory of business cycle has been more relevant in microeconomics. This theory helps in risk management, investment timing, elimination of exponential growth by using anticipated business cycle as a baseline.