In the economic world there is such a thing as “business cycles.” As statistics have shown, history repeats itself. In this article, we will examine why cycles arise, what phases they consist of, and we will talk about what are the four phases of the business cycle and theories of business cycles depending on the length of one period.
1. What is the business cycle in simple words
The business cycle (“economic cycle”) is the time interval in the economy in which there are 4 phases: growth, peak, recession, crisis. Then everything repeats. These phenomena occur regularly and follow each other.
In other words, the business cycle is a constant repeating process. The economy is always at the current moment: either inflates (grows) or contracts (falls). Moreover, to assess growth and contraction, as a rule, GDP data is used as the main macroeconomic indicator of the state of the economy in a country.
The economy is designed so that it can be in one of four phases. Moreover, they can have different time intervals, but they always follow each other. This happens periodically, but it is impossible to predict the end of each phase in advance.
You May Also Like: HOW TO FIND OLD WEBSITES THAT NO LONGER EXIST 2020
There is also another concept: The period of the business cycle is the period of time between two identical phases. Time intervals are constantly changing and are never repeated exactly.
In the modern world, business cycles have undergone small changes. The following characteristic features can be distinguished:
- Local crises escalate into global economic crises . Especially when it comes to the largest economies in the world. This is due to the fact that all countries are strongly connected with others, have a large trade turnover among themselves.
- Cycles are faster than before.
- There are systemic crises that are associated in all areas of life
2. what are the four phases of the business cycle
2.1. Growth phase
As soon as a critical point (bottom) has arrived in the economy, economic growth begins. At this point, all economic indicators are improving:
- GDP growth projected
- Inflation is decreasing
- Stabilization or strengthening of the national currency
- Unemployment reduction
- Investments (there is an influx of money into the country)
- Increase in the number of loans issued (due to low rates)
- Refinancing rate reduction
- Country credit rating increase
The stock market at this moment begins to grow on large trading volumes , since smart money always buys cheap and a lot of securities , while ordinary investors are in a panic.
2.2. Peak growth peak
The economy is in full swing. People are working, production is producing ever larger volumes of products, and sales are growing at companies.
However, at one point the market reverses. This can be caused by many factors. For example, the outflow of investments, the deterioration of GDP forecasts, the increase in loan rates, the devaluation of the national currency , the “black swan” (an unpredictable event that dramatically changes the economic situation).
As a rule, at these moments the market is oversaturated with products. Demand begins to plummet. With the fall in demand, companies’ profits are reduced, in turn, they reduce employees, and the rest – salaries. As a result, buyers begin to save more.
The result is a vicious circle. The economy is doomed to a transition to a new phase – a fall.
Usually, at these moments, the shares of companies are extremely overbought (they have the highest P / E indicators, indicators indicate a possible change in trend ). This is the most unfortunate time to invest in securities
2.3. recession Fall phase
The decline is characterized by almost the same set of parameters as growth. Only in this case, on the contrary, all indicators worsen.
Moreover, this situation usually lasts a rather long time and every day it seems that it is getting harder and harder. The media will write every day that “everything is lost.” However, in recent years, this stage has been faster than before. This can be explained by the large amount of money in circulation and a more competent crisis management policy.
2.4. Depression (pivot point or bottom)
The lowest point of economic decline. Usually at these moments some important agreements are signed, trade agreements are concluded.
This is the best time to invest. To understand in advance that this is already an absolute bottom is impossible. Even experts are mistaken and often say that now is the lowest point, but then a month later the situation worsens even more.
After depression, the growth phase begins again and the cycle repeats.
You May Also Like: BEST MONEY MAKERS AT FLEA MARKETS: HOW AND WHEN TO BUY AT FLEA MARKETS
3. The reasons for the appearance of cycles
An economy is never stable. It is constantly changing, money is constantly circulating and sometimes moving strongly affecting indicators in the economy.
The causes of business cycles can be divided into two types
- External . For example, wars, sanctions, sharp fluctuations in commodity prices, the emergence of new technologies.
- Internal . Competition within the market, the country’s economic policy, the stability of the national currency exchange rate, supply and demand, investment climate, inflation, seasonal factors of agriculture, and more.
There are two points of view:
- Deterministic is based on completely predictable factors that form during growth and fall.
- Stochastic says cycles are random as a result of shocks. A powerful impulse is forming, which is pushing the further development of the economy either to grow even more or to fall even more.
4. What are Characteristics of the four phases of the business cycle
The business cycle can be characterized by the following indicators:
- Amplitude between the highest and lowest value of the indicator during the cycle
- Duration during which one full period takes place
In turn, the duration of business cycles can be divided into the following:
- Short (2-4 years). Fluctuations in prices, quantity of goods in warehouses.
- Medium (5-15 years). Technology change, investment slides inflow and outflow.
- Long (over 30 years). New technologies, the emergence of new values.
Various scientists were engaged in research in the field of cycles. It is customary to divide them into the following:
- Kitchina (2-3 years)
- Juglara (6-13 years old). They are sometimes called “investment cycles”
- Kuznets rhythms (15-20 years). Sometimes referred to as infrastructure investment cycles
- Long waves of Kondratiev (50-60 years).
- Forrester (200 years old). They are explained by the change of materials and energy sources.
- Toffler (1000-2000 years). Due to the development of civilizations
5. Types of business cycles
5.1. Kitchin cycle (short term, 2-3 years)
The English economist Joseph Kitchin proposed his hypothesis in the 1920s, according to which the average duration of one business cycle is 2-3 years.
The market depends heavily on situations that are caused by natural demand and supply: when demand rises, then production runs at full capacity. At some point, the manufactured goods become more and more and they begin to be stockpiled. Then comes the understanding that it is necessary to slow down the pace of production.
After that, stocks in warehouses gradually begin to empty. As demand rises, the cycle repeats. Since these processes do not occur instantly, it takes just 2-3 years.
5.2. JUGLAR CYCLE (7-11 years)
The French economist Clément Juglar offered his vision of the business cycle, which lasts from 7 to 11 years on average.
The Juglar cycle describes its theory not only in terms of supply and demand fluctuations, like Kitchin, but also in terms of investment. It is believed that equipment needs to be changed on average every 10 years. This is due to outdated technology and worn parts.
However, the process of replacing equipment and investing is extremely unstable. It resembles a rather undulating character. After periods of sharp injections of money, a period of relative stability sets in.
At the same time, stock markets and company stocks react very emotionally to such changes.
5.3. The cycles or rhythms of the Blacksmith (15-25 years)
The American economist Smith suggested his theory regarding business cycles. His opinion is that they last about 15-25 years. Sometimes they are called in the literature “Blacksmith rhythms.”
He links them to demographic and construction cycles. Usually, changes in demographics occur during this time, and strong technologies become obsolete. As soon as everything becomes obsolete and stagnation sets in, large injections of money enliven production and, on the other hand, create new jobs.
5.4. Kondratiev cycles (40-60 years)
The business cycles of Kondratiev (they are also called K-cycles or K-waves) last 40-60 years. The author explains his theory by changing the basic infrastructures of a market economy: the construction of bridges, roads, buildings, enterprises, etc. The average life is an average of 40-60 years.
Most theorists distinguish the following Kondratiev waves based on historical data:
- Cycle number 1 – from 1803 to 1841-43. Textile factories, industrial use of coal, pig iron production.
- Cycle number 2 – from 1844-51 to 1890-96. Coal mining, ferrous metallurgy, railway construction, steam engine, development of maritime transport, development of new economic territories and transformation of agriculture
- Cycle No. 3 – from 1891-96 to 1945-47. Heavy engineering, electric power, inorganic chemistry, steel and electric engine production, the appearance of radio and telephone
- Cycle No. 4 – from 1945-47 to 1981-83. The production of automobiles and other machines, the chemical industry, oil refining and internal combustion engines, the emergence of synthetic materials, plastics, first-generation electronic computers, mass production
- Cycle No. 5 – from 1981-83 to 2020 (forecast). Development of electronics, microprocessors, robotics, computing, laser and telecommunications
- Cycle No. 6 – forecast from ~ 2020 to ~ 2060. Convergence of nano and bio information and cognitive technologies
5.5. Other less popular versions
There are very original versions of the emergence of business cycles. Let’s consider in a nutshell the most famous:
- Theory of Cosmic Factors (W. Jevons). Cycles associated with 10-year cycles of solar activity
- Theory of external natural factors (Beveridge, W. Zombart).
- Psychological theory (V. Pareto, A. Pigu). The changing phases of optimism and pessimism among the masses of people
- Theory of under-consumption of the population (T. Malthus, J. Sismondi, D. Hobson). Massive accumulations of rich and thrifty cause distortions in supply and demand in the market
- The theory of excessive capital accumulation (M. Tugan-Baranovsky, L. Mises, F. Hagen). Due to the mass printing of money, a strong imbalance between the actually released goods and the money supply constantly occurs. Ultimately, the big difference goes to global crises.
- Monetary theory (R. Hawthry, I. Fisher). Excessive lending to those who obviously will not be able to repay debts leads to a monetary coma to non-payment of debts, which causes a chain reaction in all areas of the economy.
You have leaned about what are the four phases of the business cycle. Explained four phases and types of cycle.