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Concept of Business cycle

Business cycle 

For the Quality of Life to improve, a conscious public policy which spends in areas like food, nutrition, health, education, shelter, social security, etc is required. But for such expenditures and investments, the economy needs equitable level of income, too!  

The income enhancement and development is dependent on growth prospects I.e real GNP. The govts try to maintain high levels of economic activity but economies fluctuate between best(boom) and worst(depression). 

They are referred to as different phases of the economic activities. In between boom and depression, there might be many other situations of the economic activities, such as—stagnation, slowdown, recession and recovery.  

The fluctuations in the level of economic activity between the depressions and booms has been called by the economists as business cycle or trade cycle with recession and recovery as the main intermediate stages. Stagnation and slowdown may be 

considered as other intermediate stages of the business cycle.  

DEPRESSION 

  • Visited the world economy only once in 1929 
  • an extremely low aggregate demand in the economy causes activities to decelerate; 
  • the inflation being comparatively lower; 
  • the employment avenues start shrinking forcing unemployment rate to grow fast; 
  • to keep the business going, production houses go for forced labour-cuts or retrenchment (to cut down the production cost and be competitive in the market) etc. 
  • The best way to avoid depression is not to let it visit. This is why every modern economy keeps extra-vigil on the major symptoms of its economy so that the prevention-measures can be taken in time and depression is avoided. 
  • The economic situations become so chaotic in the phase of depression that the governments have almost no control over the economy.  

RECOVERY 

  • An economy tries to come out of low production phase to survive.  
  • The low production phase might be depression, recession or slowdown with the former being the worst and rare.  
  • Governments take many new fiscal and monetary measures to boost demand and production 
  • an upturn in aggregate (total) demand which has to be accompanied by increase in the level of production; 
  • new investments become attractive; 
  • as demand goes upward, inflation also moves upward making borrowing cheaper for investors; 
  • new employment avenues are created and unemployment rate starts declining; etc. 
  • people’s income go for a certain increase which creates new demand and a cycle of demand and production (supply) starts playing hand-in-hand to recover the economy.  
  • To recover an economy, governments usually go for tax-breaks, interest cuts, an increase in salaries of its employees, etc.  
  • Assimilation of innovations by the entrepreneurs and search for new frontiers of enterprise do play a very vital role in the process of recovery provided these activities are at first incentives by the governments. 

The Euro-American economies recovered out of the Great Depression with the help of the measures cited above. Such recoveries have been seen many times around the world when economies recovered from slowdown or the recessionary phases.  

BOOM 

A strong upward fluctuation in the economic activities is called boom. 

As economies try to recover out of the phases of slowdown, recession and depression at times the measures taken by the governments as well as the private sector might put the economic activities as such which the economic systems fail to digest. This is the phase of the boom.  

The major economic traits of boom may be listed as given below: 

  1. an accelerated and prolonged increase in the demand; 
  2. demand peaks up to such a high level that it exceeds sustainable output/production levels; 
  3. the economy heats up and a demand-supply lag is visible; 
  4. the market forces mismatch (i.e. demand and supply disequilibirium) and tend to create a situation where inflation start going upward; 
  5. the economy might face structural problems like shortage of investible capital, lower savings, falling standard of living, creation of a sellers’ market. 

The phase of recovery is considered good for the economy and it reaches the stage of boom which is considered better. But the boom has its negative side also. Boom is usually followed by price rise. 

But the dilemma of recovery puts  every economy on the path to boom—this has been the experience in the developed world during the 1990s, especially in the US economy. The same scenario developed in India after the economy recovered from the recessionary period of 1996–97 by the year 2002–03 when the rate of inflation peaked to almost 8 per cent for a few months.  

Even the Government accepted that the economy was over-heating by mid-2007. The symptoms of overheating are as follows: 

  1. There is a downturn in the aggregate demand on overall fall in the demand; 
  2. as demand falls, the level of production (output) in the economy also falls; 
  3. as producers cut down their production levels, new employment opportunities are not created—thus employment growth rate falls; 
  4. as demand keeps on falling, usually producers start cutting down their labour force to adjust their overhead expenditure and the cost of production (labour-cut is not ‘forced’ here but, ‘voluntary’)—resulting in increase in the unemployment rate; 
  5. if the government fails to rescue the economy from the phase of recession, the dangerous stage of depression remains the logical follow up; 
  6. the rate of inflation always remains at lower levels—discouraging new investments and lending. 

RECESSION 

  • This is somewhat similar to the phase of ‘depression’ – we may call it a mild form of depression – fatal for economies as this may lead to depression if not handled with care and in time.  
  • The financial crises which followed the US ‘sub-prime crisis’ .  
  • Major traits of recession, to a great extent, are similar to that of ‘depression’ – may be summed up as follows – 
    1. there is a general fall in demand as economic activities takes a downturn; 
    2. inflation remains lower or/and shows further signs of falling down; 
    3. employment rate falls/unemployment rate grows; 
    4. Industries resort to ‘price cuts’ to sustain their business. 

In the financial year 1996–97, the Indian economy was taken up by the cycle of recession—basically due to a general downturn in domestic as well as foreign demands, initiated by the South East Asian Currency Crisis of mid-1990s. The whole plan of economic reforms in India was derailed and it was only by the end of 2001–02 that the economy was able to recover.  

What may a government do to rescue the economy from the phase of recession? The usual remedies are given below: 

  1. Direct and indirect taxes should be cut down, so that the consumers have higher disposable incomes (income after paying direct tax i.e. income tax) on the one hand and the goods should become cheaper on the other hand thus there is hope that the demand might pick up. 
  2. The burden of direct tax, specially the income tax, dividend tax, interest tax are slashed to enhance the disposable income (i.e income after direct tax payment)— 
  3. Salaries and wages should be revised by the government to encourage general spending by the consumers (as the Government of India implemented the recommendations of the fifth pay commission without much deliberation in 1996–97). 
  4. Indirect taxes such as custom duty, excise duty (cenvat), sales tax, etc. should be cut down so that produced goods reach the market at cheaper prices. 
  5. The government usually goes on to follow a cheap money supply policy by slashing down the interest rates across the board and the lending procedure is also liberalised. 
  6. Tax breaks are announced for new investments in the productive areas. etc. 

All the above-given measures were taken up by the United Front Government in 1996–97 to pull the economy out of the menace of recession. 

GROWTH RECESSION 

  • An expression coined by economists to describe an economy that is growing at such a slow pace that more jobs are being lost than are being added.  
  • The lack of job creation makes it “feel” as if the economy is in a recession, even though the economy is still advancing. 

DOUBLE DIP RECESSION 

  • Recession is ‘two consecutive quarters of falling GDP’, where as double dip is an extension of it. 
  • It refers to a recession followed by a short-lived recovery, follwed by another recession. 
  • Causes vary but it often includes slowdown in demand because of layoffs and spending cutbacks in previous downturn. 

ABENOMICS 

  • Named after Japanese PM Shinzo Abe 
  • Set of economic measures he took to rejuvenate the sluggish Japanese economy from spells of recession like situation. 
  • Three arrows  
    1. Fiscal stimulus: encouraging investments in infrastructure by fiscal concessions, more investments in public works, increasing salaries and new jobs etc 
    2. Quantitative  easing:  maintaining interest rates near sub zero leading to increase in the money flow and increase inflation. This leads to depreciation. The move  boosts both domestic and external demand. 
    3. Structural reforms: a variety of deregulations to increase competitiveness. 

Business cycles are nothing but fluctuations in economic activities. The causes of these fluctuations include 

  1. Economic instability and uncertainty may discourage investments thereby reducing growth 
  2. Lack of innovations may put an economy on the path of slumpj 
  3. Unforeseen disasters 
  4. Anti-inflationary measures 
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