What are the main stages of business cycle? What causes fluctuations in the business cycle?
Prosperity (процветание) is ordinarily used to describe an extended period of high employment, an improved standard of living and stable prices.
By contrast, "depression" refers to an extended period of general underemployment of our economic resources. Factories are idle (простаивают), millions of workers are unable to find jobs, and the rate of business failure (банкротства) is high. The worst depression in American history, now known as the Great Depression, lasted from 1930 to 1940.
More common, however, are much shorter and less dramatic changes in business activity. We will refer to them as periods of boom, contraction, recession and expansion.
Boom. At the peak of the business cycle the economy is booming. Business is producing at or near capacity, and those looking for work can generally find jobs. During peak times, business investment and consumer spending are at very high levels. But because the economy is at or near full employment and the demand for goods and services is increasing, prices are also increasing. This sets the stage for the next phase of the business cycle.
Contraction. consumers and businesses begin to reduce their spending levels. Businesses may lay off workers, reduce their purchases of raw materials and reduce production because they have built up excess inventories (запасы). Some businesses may decide to continue to use old factories and equipment rather than investing in new machines and buildings. Some businesses and consumers will even reduce spending. Because of the layoffs, workers, who are also consumers, spend less.
Recession. With factories operating at less than capacity and unemployment at very high levels, total output of goods and services enters a long-term decline. This is the bottom phase of the business cycle, or as economists describe it, the period of recession. Times are hard during recessions. Unemployment is very high, jobs are difficult to find and many businesses fail. A very severe and long-lasting recession is called a "depression."
Expansion. After a period of recession the economy eventually begins to recover, entering the expansion phase of the business cycle. During a period of expansion, business and consumer spending begins to increase. business begins to expand its activities. Unemployment declines as additional workers are hired. This, in turn, leads to higher levels of consumer spending and still farther expansion of employment, output and consumption.
What Causes Business Cycles?
External Causes. External events are those outside the economic system that explain fluctuations in the business cycle.
Population changes. Changes in population affect the demand for goods and services. Population increases can lead to increased production and employment levels that trigger expansion and boom. Population decreases are likely to have the opposite effect.
Inventions and innovations. Major changes in technology, such as the development of the automobile, the airplane and the computer, have led to bursts of business activity and investment. This, in turn, was followed by increased employment opportunities and a period of expansion and boom.
Wars and political events. Often such events affect the direction of the business cycle. The rise of Nazi Germany and the outbreak of World War II triggered American rearmament. As the nation rebuilt its armed forces, the Great Depression came to an end, and the economy entered a period of expansion and boom. In more recent years, the Arab oil boycott of the 1970's caused a downturn in the economy.
Internal causes. Internal causes of fluctuations are factors within the economy likely to start an expansion or contraction of the business cycle.
Consumption. When consumer spending is on the increase, business firms hire additional help and increase their level of production. As production, employment and sales increase, the business cycle enters a period of expansion and boom. When consumer spending decreases, the opposite occurs. Production is reduced, workers are laid off, and the economy enters a period of contraction and recession.
Business investment. Investment in capital goods like plant, tools and equipment, creates additional jobs, thereby increasing consumer purchasing power. When investment decreases, the opposite occurs and the economy enters a period of contraction.
Government activity. Government does this in two ways. One is through the use of its power to tax and spend. The other is by regulating the supply of money and credit in circulation. Economists describe government's ability to tax and spend as its fiscal powers, and its ability to regulate the supply of money and credit as its monetary powers.