What are Business Cycles?

Economic cycles are alternations that take place in the economy between strong and growing periods, with periods of low and economic recession. This concept has been treated by different economists since the 18th century as a way of explaining the reasons for the economic crises, taking into account the behavior of the markets. The theory behind economic cycles seeks to understand the reasons why economies grow with fluctuations and not the trend they should follow.

How Business Cycles Work

Economic cycles are disturbances in the economy, where there are ups and downs that circulate around a balance of stability.

Macroeconomic science explains that there is a constant growth trend in the Gross Domestic Product (GDP) in the long run, but in shorter periods there are growths and recessions.

This fluctuation, characterized by the image above, indicates the existence of periods of growth with little or much intensity, followed by periods of recession, both outside the trend.

For some economists, an intense spike may indicate a period of recession ahead, when asset prices and lending fall sharply.

In the philosopher Karl Marx’s version, when economic crises happen, each company accumulates its capital (goods produced), so that the supply exceeds the demand. On the other hand, there is a period of growth in which companies must increase their capital.

Economist Joseph Schumpeter, on the other hand, believed that recessions were part of the success of capitalism. For him, there is a “creative destruction” that causes constant innovations in the economy, while cycles happen.

Stages of business cycles

From a period of economic growth, cycles can be characterized by the aggregate activity of the economy through the phases:

Expansion

When aggregate demand is high, companies have high profits and increase production.

Expansion peak (boom)

This is the highest point that the economy reaches, where the aggregate supply presents excesses.

Contraction (start of recession)

Phase when companies reduce prices to compete for consumers, while there is increasing unemployment.

Economic crisis (depression)

Phase when companies have very low profits and unemployment is high.

With this, a new cycle in the economy begins with the new period of expansion and the increase in aggregate demand.

Types of business cycles

The cycles of an economy do not have a regular periodicity. Some periods of growth predominate for a long time and others pass quickly.

Because of this, some authors of economic science have presented names to the cycles according to the time in which they can last.

Long Kondratiev cycles

Economic cycles studied by Russian economist Nikolai Kondratiev and which, according to him, are formed by long periods that take from 40 to 60 years.

These cycles were explained by Kondratiev as part of the technological revolutions that marked the capitalist world with intensity, causing growth and crises.

He studied the long cycles that took steam engines from rise to fall (1790-1850), railways (1850-1896) and finally electrification with the appearance of automobiles (1896-1930).

Cycles of 7 to 11 years of Juglar

Attributed to the work of Clément Juglar, who studied long-term cycles, which take an average of 7 to 11 years in the UK in the 19th century.

This cycle links the ups and downs of the Gross Domestic Product (GDP) with investment spending, inflation and fluctuations in the labor market.

Kitchin cycles of 2 to 4 years

Cycles analyzed by statistician Joseph Kitchin, who relates them to business cycles of companies in an economy.

This theory takes into account the changes that companies make in their inventories as demand, supplier prices or interest rates on loans change.

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