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Q1. What is a business cycle? Describe the different phases of a business cycle.


The business cycle or economic cycle refers to the fluctuations of economic activity about its long-term growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). These fluctuations are often measured using the real gross domestic product. Despite being named cycles, these fluctuations in economic growth and declines do not follow a purely mechanical or predictable periodic pattern.

Business cycle is a series of fluctuations in the economic activities of organized communities over a long period of time.
Characteristics of Business Cycle:
· It is a wave like movement.
· A trade cycle is synchronic in nature. The entire business of economy acts like an organism.
· It occurs periodically and hence recurrent in nature.
· Trade cycles are similar but not identical in their nature.
· It is all embracing or all pervading.
· Effects of trade cycles are different.
· A trade cycle is self-generating. The process is cumulative and self-reinforcing.
· A trade cycle is international in character.
· The prosperity phase takes double the time taken by the depression phase.
· The downward movement is more sudden and violent than the change from downward to upward.
Diagrammatic representation of Business Cycle:
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Fig.: An abstract business cycle
In the above diagram we identify varies stages/phases of business cycle.
Phases of the business cycle:
1. Depression, Contraction or downswing:
It is the first phase of a trade cycle. During this period, the level of economic activity is extremely low.

It is characterised by a low level of economic activity. This phase is known as high un-employment, falling prices, wages, interest, and profit. While all sectors in the economy suffer, some suffer more than others.
This period is characterized by:
·         A fall in the price.
·         A fall in interest rates.
·         Fall in the marginal efficiency of capital and hence the level of investment.
·         Contraction in bank credit.
·         A high rate of business failures.
·         A reduction in the volume of output, trade and transactions.
·         An increase in the level of unemployment.
·         A reduction in aggregate income of the community especially wages and profits.
·         There is a lot of excess capacity as industries producing capital and consumer goods work capacity due to lack of demand.
2. Recovery:
Recovery refers to the lower turning point at which an economy undergoes changes from depression to prosperity. With improvement in demand for capital goods, recovery sets in when the demand for consumption goods rises, prices start rising and so on.
The recovery may be initiated by the following factors:
·         Government expenditure.
·         Changes in production techniques.
·         Investment in new regions.
·         Exploitation in new sources of energy etc.
·         New innovations.
·         Low production costs.
As a result of these factors, business people take more risks, invest more. Low wages, interest rates, cost of production, recovery in marginal efficiency of capital etc induce the business people to take new ventures.

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