• A wave like fluctuations of economic activity characterised by recurring phases of expansion & contraction in periods varying from 3 to 4 yrs.

• Fluctuations found in aggregate economic activity of nations

• A cycle consists of general expansions, followed by general recessions, contractions & revivals which merge with the expansion of next cycle.

• The sequence of change is recurrent but not periodic.

• Recurring fluctuations : occur in a free rhythm, recurrence of expansion & contraction has no fixed period

• Period of business cycle is longer than a year typically 3-4 yrs

• Presence of alternating forces of expansion & contraction – these forces are built into the system

• Phenomenon of the crisis : peak & trough are asymmetrical

• Every business cycle has the critical mark-off points of peak & trough

• From trough to peak there is a expansion phase & from peak to trough the contraction phase.

• Apart from these two longer phases there are two other turning points

• Upper turning point located at the peak marks the beginning of recession

• Lower turning point located at trough is venue of revival

• Both recession & revival phases are relatively shorter in duration

• According to Burns & Mitchell there are 4 distinct phases :

• Revival• Expansion• Recession• Contraction

• The expansion phase begins from an equilibrium position under the stimulus of forces which create expectations of rising profits which in turn induce entrepreneurs to increase the scope of their activities

• Leads to more employment, more demand for raw materials, leads to larger employment in other industries, more wages, increase in demand for consumption goods.

• Rapid increase in supply and modest increase in prices

• Supply in later stages increases with a lag & this leads to rise in prices which gathers momentum later on

• Delay in price rise due to unutilized plant capacity available in the early stages, later stages bottlenecks appear.

• Rise in prices more marked when large proportion of productive capacity is set up.

• New factories, steel plants, increased production of heavy engineering goods, commercial & housing complexes, power projects

• Increase in income, consumption• Supply of consumption goods does not keep

pace so increase in price

• Distortions of price relations: price do not rise uniformly during this phase

• Prices of raw materials & semi finished goods rises faster than prices of consumption goods

• Wages, salaries, interest rates, taxes lag behind

• Expansion reaching its height – rising profits & optimism about its continuance boost the stock prices

• Increase in investment by entrepreneurs – higher output, prices & profits

• Expansion in money supply especially bank credit• Confidence in business induce banks to expand credit,

speed up velocity of circulation of money• Leads to growth of fixed capital – plant, machinery &

equipment, wage increases, consumption increases• Manufacturers, wholesalers & retailers stock up

inventories

• The end of expansion – expansion itself brings into play forces which lead to recession

• Gradual rise of costs relative to prices, narrows down profit margin & expansion gets weakened.

• During later phase increase in cost due to growing pressure of demand for materials, labour & finace.

• This phase is a turning point & relatively shorter• Forces of expansion weakened & those of

contraction strengthened.• Recession is characterised by liquidation in stock

market, strains in banking system, some fall in prices, sharp reduction in demand for capital & abandoning projects

• Production of consumer goods does not decline immediately – people persist with their living standards for sometime despite fall in income.

• It falls with a lag.

• In contrast fall in production of capital goods is dramatic

• Abandoning of investment programs, demand for equipment, machinery & plant fall

• Most dramatic & noticeable signs of recessions advent is the weakening of the stock market

• Borrowers on stock market find that their collateral is shrinking & find it necessary to repay some of their loans.

• New issues are postponed – corporate shelve their investment program

• Orders for plant, machinery, equipment or buildings are reduced

• Banks are reluctant to expand the volume of credit

• Recession ultimately merges into depression which is the phase of relatively low economic activity

• When economy moves from recession to depression there is a notable fall in production & employment

• Agriculture & retail is affected less, manufacturing, mining, construction etc are affected more

• Industrial sector : worst affected are those which produce machines, tools, plants, equipment & steel.

• There is a substantial reduction in incomes of people & thus the demand for consumer goods & services decline

• Still decline is far less than the demand for machines & equipment

• Substantial reduction in demand for durable goods• General price level falls, producers & wholesalers

seeing falling demand liquidate inventories piled up during prosperity phase.

• Leads to increase in supply & fall in prices, also reduced purchasing power due to contraction also leads to fall in price

• Steadily declining prices erode the profits of producers & traders alike

• Pessimism crawls, no new investment, reduction in bank credit, distortions in price structure

• Distortion also appear in cost-price relations because costs do not fall proportionately to prices

• Wages & salaries are sticky, rents, interest rates, insurance premium & taxes are slow to move downwords

• Prices keep falling & profit margins are wiped out

• Recovery starts when forces that work to restore the normal price relations & cost price relations start operating effectively

• Recovery is gradual, starts when price stops falling

• When inventories are exhausted, supplies reach scarcity levels & downward movement of prices is arrested then producers see no risk in undertaking production

• Demand for durable goods & investment starts increasing