Contents

Introduction to business cycle. 2

Reasons for Business Cycles. 2

Conclusion.. 4

References. 5

Q3. Clearly explain why business cycles occur.

Introduction to business cycle

In this modern era, many of the industrial economies are experiencing the significant swings in the activity of an economy. In the recent years most of the industries were at boom and the ratio of unemployment was also low. But nowadays the industries are facing serious problems of unemployment and their production is well below the capacity. The time period in which the prospect of an economy is at its best is known as boom or an expansion. On the other hand if the economy is declining it is known as the depression or recession. This combination of recession and expansion, the flow and ebb of an economic activity is known as the business cycle. It is said that most of the indicators of an economy move together. During the period of boom, there is an increase in the output levels and employment as well which can lead to falling unemployment (TVEDE, 2006). There is an increase in new construction and this might also lead to inflation rising if this expanding period is brisk. On the other hand during the periods of recession, the output of services and goods declines and the employment level also falls which can lead to rising unemployment level. The new construction can also decline during this stage. It is also seen that the prices of the goods also fall during the period of recession. Recession is the time when many economic indicators are found to be falling for the time period which is sustained for roughly around 6 months. The business cycles are recorded accordingly when the economic activities changes direction. There is a peak of this cycle which is often referred to the previous month before the important economic indicators which include the output, retail sales and employment which begins to fall. As these key indicators of an economy often vary the direction at various times, the dating of troughs and peaks is necessarily considered as subjective. There are many ways in which the term of business cycle is often considered as misleading one. Cycle itself indicates there is regularity in the duration and timing of the downswings and upswings in an economic activity. Many of the economists don’t consider this concept as correct. For instance there were around 3 recession’s period between the years 1973-1982. But then the trough of 1982 was followed by the 8 years of expansion which was an uninterrupted one. The recession of 1980 lasted for 6 months and the 1981 recession lasted for 16 months. Therefore in order to describe the swings in an economic activity, many of the economists prefer this term as the short run fluctuations in an economy to business cycle (MULLINEUX, 1984). 

Reasons for Business Cycles

There are many different stages in a business cycle and there are different reasons for the happenings in each stage. The first stage is a boom which defines the real national output which is rising at a great pace as compared to the trend growth rate. In a period of boom there is a consumption growth which is helped along with rise in the real incomes, surging house prices and strong confidence. There is a rise in the capital goods’ demand as businesses are willing to invest the additional capacity in meeting the rising demands and making extra profits. There is an increase in jobs and hence reduced unemployment levels along with the high real wages for the workers.  The other great characteristics of boom include the increase in the government revenues collected from tax which can be later utilized in spending in the weak areas in the economy. This period of boom can lead to the inflationary pressure increasing if the whole economy overheats and is having the positive output gap. The country like UK enjoyed a sustained growth for over the last 15 years which is one of the best examples.

Slowdown

The period of slowdown occurs when the growth rate decelerates and the national output is found to be still rising. If the economic growth is achieved without falling in the hands of a recession, this is known as the soft landing.

Recession

Recession is a period of falling national output levels. It is a period in which the growth rate is a negative one which can lead to the contraction in profits, incomes and employment. It can be also quoted as a falling real GDP for the 2 consecutive quarters or 6 months. There are some of the major symptoms of recession and it includes:

·         Fall in the purchases of raw materials and components from most of the supply chain businesses

·         Less job vacancies and rising unemployment

·         Increase in the business failures number

·         Declining business and consumer confidence

·         Rise in the proportion of the income which is spent and the contracting consumer spending levels

·         Dropping value of imports and exports of services and goods

·         Falling tax revenues and spending of welfare increases

·         The fiscal deficit starts to rise quickly

Causes of recession

• Recessions are generally considered as unusual. Many of the economists consider it as a feature which is an inevitable one in the market due to the cyclical nature of employment, demand and output.
• Every recession is considered as different. The fact cannot be denied that the world’s credit crunch is largely important in downturn causes although the macroeconomic policies are trying hard in preventing it. 

There are some of the great factors which are available for people to know about the 2009 recession in UK. Some of the key factors include:

·         The collapse of the property boom in UK

·         Reducing real disposable incomes

·         Falling consumer confidence

·         Falling exports because of other countries experiencing a downfall in their economy

·         Increase in unemployment

Recovery

A recovery can occur when the real levels of national output starts picking up again from the point of recession.  The recovery is highly dependent on the aggregate demand factor which suddenly starts to increase and the producers are again increasing their output and rebuilding the stock levels in anticipating the rising demand. The business confidence again starts to increase.

There are some of the great policies which were being adopted in UK to prevent the whole recession from turning into a depression which could have been a damaging one. There were certain factors which were paid attention to which include:

·         Cut in the interest rates

·         Rising government borrowings

·         Quantitative easing policy by Bank of England

·         Cutting rates of VAT

Conclusion

There is strong evidence available which supports the fact that there are deviations occurring because of the full employment which are often the outcomes of the spending shocks. Monetary policy is the main reason behind the swings in the business cycles. For instance, during the recession period in the early 1970s and 80s, the raising of interest rates impacted greatly on the business cycles. In case of expansion, the inflationary booms in the year 1960s-1970s, these were least partly because of the low interest rates and monetary ease. The major impact on the business cycles is often seen because of the variation in the flow of money. There are many prewar depressions which include the recessions of 1921, 1908 and the 1930s great depression which were all because of the monetary contraction and the real interest rates which were high. In the earlier era, there were swing because of the financial panics, monetary developments and the mistakes in policy. Recessions which were seen in the early era of postwar were of similar severity as seen before the World War 1. The decreasing downturns frequency reflects the economic policymaking progress. There are some of the great depressions which bring in large strides in the economic understanding and the government’s capacity in moderating cycles. There is an employment act which says that the government uses the tool in stabilizing the employment and output (STOCK, 1993). It is because of these tools there are many of the shocks which have been counteracted and prevented long periods of recessions. In the earlier times the policymakers used the expansionary policy for too long and this led to an increase in the inflation levels. It is because of this reason the Federal Reserve required to adopt the contractionary fiscal and monetary policies in moderating the recession to bring the inflation levels down.

References

ZARNOWITZ, (1992). Business cycles theory, history, indicators, and forecasting. Chicago, University of Chicago Press.

STOCK, J. H. (1993). Business Cycles, Indicators, and Forecasting. Chicago, University of Chicago Press.

PUU, T., (2006). Business cycle dynamics models and tools. Berlin [etc.], Springer.

BELONGIA, (1992). The business cycle: theory and evidence : proceedings of the Sixteenth Annual Economic Policy Conference of the Federal Reserve Bank of St. Louis. Boston u.a, Kluwer Acad. Publ.

MULLINEUX, (1984). The business cycle after Keynes: a contemporary analysis. Totowa, N.J., Barnes & Noble Books.

TVEDE, L. (2006). Business cycles: history, theory and investment reality. Chichester, West Sussex, England, John Wiley & Sons.

OPPENLÄNDER, (1997). Business cycle indicators. Aldershot [u.a.], Avebury.

HÉNIN, P.-Y. (1995). Advances in business cycle research: with applications to the French and US economies. Berlin, Springer.