Business Cycles
Economic or business cycles are fluctuations in economic activity (economic conditions), consist of repeated compression (economic recession, recession, depression), and expansion of the economy (economic recovery). Cycles are periodic, but usually irregular. Usually (in the framework of the neoclassical synthesis) are interpreted as fluctuations around the long-term trend of economic development.
Cyclicity in the development of a market economy is explained, first of all, by the influence of internal factors inherent in the system itself. The mechanism of the "invisible hand" of the market on the basis of economic laws (laws of supply and demand, competition, capital accumulation) is spontaneously regulate macroeconomic equilibrium. At the same time, the desire for economic agents to maximize profits, the expansion of production scale, the growth of investment incentives as economic development leads to a state where the total supply goes beyond market demand. Most economic theorists believe that overproduction crises due to a serious violation of the relation between aggregate demand and aggregate supply. However, through the economic crisis and the measures used to get out of it, the balance is restored. There is a mass renewal of fixed capital, improving the sectoral structure of the economic system. E. Hansen connects causes of economic ups and downs with the influence of the cycle of investment.
In researches of the causes of business cycles is currently widely spread approach that the cycles are due to random effects on the economic system, the so-called pulses or shocks that violate the economic balance and causing sympathetic vibration.
For the first time, these ideas were expressed by the Soviet economist Evgeny Slutsky in 1927. A similar study was conducted by the Norwegian scientist Ragnar Frisch and is reflected in his work "Problems of pulse propagation in the economy," published in London in 1933.
Keynes believed the main source of pulses, causing economic fluctuations, investment costs, which by the definition of "entrepreneurial flair" to the risk inherent instability. As a result, there are shifts in aggregate demand and, consequently, in the aggregate supply.
In investment theory a model of the multiplier-accelerator is widely used, which explains the dynamics of the investment mechanism of action of the accelerator, ie investments are exposed to are not very issue volume, and its fluctuations.
Nobel Prize-winning economist James Hicks believed that the main cause of the oscillation to be found in the impact that has on the investment changes in output (or income), what is, in fact, expressed the effect of acceleration. According to him, commercial and industrial boom is none other than the period of intensive capital accumulation, and the decline is simply a suspension of accumulation.
Deterministic point of view on the causes of business cycles is based on the predictable, well-defined factors emerging on stage lifting (recession factors) and fall (rise factors). Stochastic point of view comes from the fact that the cycles are generated by random factors of nature and represent the response of the economic system to internal and external shocks.
- short Kitchin cycles (typical period - 2-3 years);
- medium Juglar cycle (typical period - 6-13 years);
- rhythms of Kuznets (typical period - 15-20 years);
- Kondratieff long wave (typical period - 50-60 years).
In business cycles are four relatively clearly distinguishable phases: peak, recession, the bottom (or "lowest point") and the rise; but the greatest of these phases are characteristic of Juglar cycle.
The rise (recovery) occurs after reaching the lowest point of the cycle (bottom) and characterized by a gradual increase in employment and production. Many economists believe that this stage characterized by low rates of inflation. Innovations are happening in the economy with a short payback period. Realized demand deferred during the previous recession.
Peak of the business cycle is the "high point" of economic recovery. In this phase of unemployment usually reaches its lowest level ever disappear completely, production facilities operate at maximum or close to the load, that is, are utilized in the production of almost all available in the country material and labor resources. Usually, though not always, during peak intensifies inflation. The gradual saturation of the market increases competition, which reduces the rate of return and increases the average payback period. The need for long-term loans with a gradual reduction opportunities repayment is increases.
Downturn (recession) is characterized by a reduction in production volumes and a decrease in business and investment activity. This increases the growth of unemployment. Officially phase of economic downturn or recession, according to the fall in business activity, continued for more than three consecutive months.
Bottom (depression) of the economic cycle is the "lowest point" of production and employment. It is believed that this phase of the cycle is usually not long. However, history knows and exceptions to this rule. The Great Depression of the 1930s, despite periodic fluctuations in business activity, lasted 10 years (1929-1939).
The theory of real economic cycles explains ups and downs of real influence factors. In industrialized countries, this may be the emergence of new technologies, changes in commodity prices. In agrarian countries - harvest or crop failure. Also, the impetus for change can become a force majeure (war, revolution, natural disasters). Anticipating changes in the economic situation for the better or for worse, households and firms massively starting to save or spend more. This reduces or increases aggregate demand increases or decreases the turnover of retail trade. Firms receive less or more orders for products, changes accordingly the volume of production, employment. Changing business activities: the company begin to reduce the range of products or conversely launching new projects, take out loans for their implementation. That is the whole economy fluctuates, trying to come to equilibrium. In addition to fluctuations in aggregate demand, there are other factors that affect the phase of the economic cycle changes depending on the change of seasons in agriculture, construction, automotive, retail seasonality, secular trends in economic development of the country, depending on the resource base, population size and structure , proper management.
The existence of the economy, as a set of resources for the steadily growing consumption, is oscillatory. Fluctuations in the economy expressed in the economic cycle. "Thin" aspect of the business cycle downturn is considered that at some scale can go into crisis.
Concentration (monopolization) capital leads to the "wrong" decisions on the scale of the economy of the country or even the world. Any investor is seeking income from their capital. Investors' expectations on the size of the revenue come from the stage rise-peak when the maximum income. In the downturn investor considers disadvantageous for you to invest in projects with a yield lower than "yesterday."
Without such investments (investments) is reduced industrial activity, as a consequence of the solvency of workers in this sector, who are consumers of goods and services other spheres. Thus the crisis one or more branches reflected in the whole economy.
Another problem is the concentration of capital - the removal of the money supply (money) from the sphere of consumption and production of consumer goods (as well as the scope of means of production of these goods). Money received in the form of dividends (or profit), accumulate in the accounts of investors. There is a lack of money to maintain the required level of production, and as a consequence of this reduction in the volume of production. Growing unemployment, the population saves on consumption, there is a drop in demand.
These companies not only carry heavier other business downturn, but also the most benefit from the rise in the economy. The main reasons are two: the possibility of postponing purchases and monopolization of the market. Purchase of capital equipment can often be postponed for the future; in difficult economic times, manufacturers tend to refrain from purchasing new machinery and equipment and construction of new buildings. During prolonged downturn firms often prefer to repair or upgrade outdated equipment, instead of spending a lot of money for the purchase of new equipment. As a result, investment in capital goods during economic downturns is drastically reduced. The same applies to consumer durables. Unlike food and clothes, buy a luxury car or an expensive home appliances can be postponed until better times. In the recession people are more likely to repair, rather than changing consumer durables. Although the volume of sales of food and clothing, as a rule, are also reduced, this reduction is usually less than the drop in demand for durable goods.
Monopoly power in many industries producing capital goods and consumer durables, due to the fact that the markets of these products are usually dominated by a few large firms. Monopoly position allows them during economic downturns to keep prices at the same level, reducing production in response to falling demand. Consequently, the drop in demand in a much greater impact on production and employment, rather than on price. A different situation is typical for industries producing goods of short-term consumption. The fall in demand these industries usually respond general decline in prices, since none of the firms has significant monopoly power.
Economic cycles are not truly "cyclical" in the sense that the length of the period of, say, from one to another peak during the history greatly varied. Although economic cycles in the US lasted an average of about five years, it is known about cycles lasting from one to twelve years. The most pronounced peaks (measured as a percentage increase over the trend of economic growth) coincided with the great wars of the 20th century. And the deepest economic downturn, excluding the Great Depression, was observed after the First World War. It should be noted that in addition to those described in the theory of the business cycle is also made so called long cycles. Indeed, at the end 20s the US economy appears to have entered a period of prolonged recession, as evidenced by some of the economic indicators, in particular the level of real wages and the amount of the net investment. Nevertheless, even in the presence of a long-term downward trend in the rate of growth the US economy continues to grow; although in the early 1980s, the country recorded a GDP growth in subsequent years, except in 1991, he remained positive. Symptomatic began in the 1960s, long-term decline is the fact that, although the pace of growth rarely has a negative, the level of economic activity in the United States since 1979 is almost never exceed the value of trend growth.
Works Cited
Romer, Christina D. (2008). "Business Cycles". In Henderson, David R.. Concise Encyclopedia of Economics (2nd ed.). Indianapolis: Library of Economics and Liberty. ISBN 978-0865976658. OCLC 237794267.
A. F. Burns and W. C. Mitchell, Measuring business cycles, New York, National Bureau of Economic Research, 1946.
