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Business Cycles

Features of Business Cycles

No business in any economy has a straight trajectory. They all have periods of economic expansion and periods of contraction. The environment of the economy is very dynamic and it has a significant effect on the business firms. These business cycles all have some common characteristics. So let us learn about the features of business cycles.

Business Cycle

The business cycle is the natural expansion and contraction of the production and output of goods and services that happens over a period of time. It can be said to be the economic rise and fall of a firm in the economy.

It is most importantly a tool to understand the economic conditions of the firm and the economy in general. The firm can use this analysis to make necessary changes to their policies.

One thing to understand that business cycles are a natural phenomenon that occurs over time. Every firm will go through the cycles. No firm can have a constant growth or decline over its life cycle. There are always ups and downs in the economic activities of the firm.

Features of Business Cycles

Features of Business Cycles

The four different phases of business cycles are – expansion, peak, depression, and recovery. While all these phases have their own unique characteristics, there are some features that are common to all the phases. Let us take a look at these features of business cycles.

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1] Occur Periodically

As we saw, these phases occur from time to time. However they do not occur in for specific times, theirĀ time periods will vary according to the industries and the economic conditions. Their duration may vary from anywhere between two to ten or even twelve years.

Even the intensity of the phases will be different. For example, the firm may see tremendous growth followed by a shallow short-lived depression phase.

2] They are Synchronic

Another one of the features of business cycles is that they are synchronic. Business cycles are not limited to one firm or one industry. They originate in the free economy and are pervasive in nature.

A disturbance in one industry quickly spreads to all the other industries and finally affects the economy as a whole. For example, a recession in the steel industry will set off a chain reaction until there is a recession in the entire economy.

3] All Sectors are Affected

All major sectors of the economy will face the adverse effects of a business cycle. Some industries like the capital goods industry, consumer goods industry may be disproportionately affected.

So the investment and the consumption of capital goods and durable consumer goods face the maximum brunt of the cyclic fluctuations. Non-durable goods do not face such problems generally.

4] Complex Phenomenon

Business cycles are a very complex and dynamic phenomenon. They do not have any uniformity. There are no set causes for business cycles as well. So it is nearly impossible to predict or prepare for these business cycles.

5] Affect all Departments

Trade cycles are not only limited to the output of goods and services. It has an effect on all other variables as well such as employment, the rate of interest, price levels, investment activity etc.

6] International in Character

Trade cycles are contagious. They do not limit themselves to one country or one economy. Once they start in one country they will spread to other countries and economies via trade relations and international trade practices.

We have an actual example of this when the Great Depression of 1929 in the USA, later on, had an adverse effect on the entire global economy. So in an integrated global economy like today’s the effects of a trade cycle spread far and wide.

Solved Example onĀ Features of Business Cycles

Q: The length of each phase of a business cycle is ____?

  1. Indefinite
  2. Definite
  3. Fixed
  4. None of the above

Ans: The correct answer is A. The phases of a trade cycle do not display any regularity or uniformity. We cannot determine the length, duration or intensity of each phase. This is one of the important features of business cycles.

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