Introduction and definition business cycles

A basic postulation of classical economics is
the assumption that economic aggregate (employment, income and prices) will
tend to be stable at the full employment level. In other words, such variables
can manifest only minor and temporary fluctuations around the full employment
level. Long before Keynes however, many economists (regarded in general as
business cycle theorists’), expressed dissatisfaction with the classical model
in view of the observed fluctuations in the level of economic activities in the
real world.

Among these were some classical economists such
as J.S. Mill and Alfred Marshal. They sought to explain the regular fluctuations
(expansions and contractions) in economic activities within the context of the
market economy. Their concern was on short run fluctuations in the level of
economic activities (such as characterize the movement of the economy from one
equilibrium position to the other). Macroeconomic aggregates (economic series)
are known to manifest two types of movements over time.
A long-term trend i.e., changes or movements in
these variables that are observed over the long run. In this regard, the forces
of expansion have been generally stronger than the forces of contraction, such
that the long run changes in the level of economic activities, in most cases,
reveal an upward trend in potential GNP. In other words, changes in economic
aggregates have generally led to long run economic growth.
A short-term fluctuation along the long-term
trend or oscillations of actual GNP around the potential output. Short-term
changes in the level of economic activities (aggregate variables) may sometimes
be attributable to seasonal factors, such as when during the Christmas season,
there is a massive increase in aggregate demand and output and a rise in
prices. Such changes are called seasonal variations (or periodic changes) in
the level of economic activities. However not all short-run oscillations of
economic series are due to seasonal variations.
Business cycles refer to short-term oscillations
of economic series around the long-term trend that are not attributable to
seasonal factors. Lipseyet al defined business cycles as the
continual ebb and flow of business activity that occurs around long-term trend
after seasoned adjustment have been made. Mitchell defined a business cycle as
consisting of expansions occurring at about the same time in many economic
activities followed by similar general recession, contractions and revivals
which merge with the expansion phase of the next cycle. Such sequence of
changes is recurrent but not periodic.
Business cycles are thus cyclical oscillations
(or wave – like changes) in the general pace of economic activities
characterize by cumulative movements that eventually reverse themselves. Such
oscillations are regular features of a dynamic economy. Sundharam and Vaish has
identified three characteristics of a business cycle as follows
Business cycles are characterized by alternating
forces of expansion and contraction.
There is a degree of regularity in the duration
and time sequence of upward and downward movements of business cycle.
A business cycle is characterized by the
presence of crisis. The change from the upward to the downward movement is more
sudden and violent than is the change from the downward to the upward movement.

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