The Business Cycles as a Form of Economic Development

This cycle is believed to be accounted for by time lags in information movements affecting the decision making of commercial

The Business Cycles as a Form of Economic Development

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ment of commercial situation through the increase in output through the full employment of the extent fixed capital assets. As a result, within a certain period of time the market gets flooded with commodities whose quantity becomes gradually excessive. The demand declines, prices drop, the produced commodities get accumulated in inventories, which informs entrepreneurs of the necessity to reduce output. However, this process takes some time. It takes some time for the information that the supply exceeds significantly the demand to get to the businessmen. Further it takes entrepreneurs some time to check this information and to make the decision to reduce production, some time is also necessary to materialize this decision (these are the time lags that generate the Kitchin cycles). Another relevant time lag is the lag between the materialization of the above mentioned decision (causing the capital assets to work well below the level of their full employment) and the decrease of the excessive amounts of commodities accumulated in inventories. Yet, after this decrease takes place one can observe the conditions for a new phase of growth of demand, prices, output, etc.

 

Middle-term cycles

 

Juglar was one of the first to develop an economic theory of business cycles. He identified the 7-11 year fixed investment cycle that is now associated with his name. Within the Juglar cycle one can observe oscillations of investments into fixed capital and not just changes in the level of employment of the fixed capital (and respective changes in inventories), as is observed with respect to Kitchin cycles. The recent research employing spectral analysis has confirmed the presence of Juglar cycles in the world GDP dynamics up to the present time.

 

Long Cycles (The Kondratiev wave)

 

The cycle is supposedly more visible in international production data than in individual national economies. It affects all the sectors of an economy, and concerns mainly output rather than prices. According to Kondratieff, the ascendant phase is characterized by an increase in prices and low interest rates, while the other phase consists of a decrease in prices and high interest rates.

Kondratieff identified three phases in the cycle: expansion, stagnation, recession. More common today is the division into four periods with a turning point (collapse) between the first and second phases.

A fourth cycle may have roughly coincided with the Cold War: beginning in 1949, turning with the economic peak of the mid-1960s and the Vietnam War escalation, hitting a trough in 1982 amidst growing predictions in the United States of worldwide Soviet domination and ending with the fall of the Berlin Wall in 1989. The current cycle most likely peaked in 1999 with a possible “winter” phase beginning in late 2008. The Austrian-school economists point out that extreme price inflation in the absence of economic growth is a form of capital destruction, allowing either stagflation or deflation to represent a recession or depression phase of the Kondratieff theory.

 

 

Stabilizing policy of the State

 

The main goal of the stabilizing policy is to reduce the wave hesitance. There are two types of policies like this.

 

The Policy of containment.

 

This is an activity to reduce the demand. Government uses it at the stage of peak. At this moment the demand is growing thats why entrepreneurs are striving to rise the prices and expand the production. And this causes the inflation potential. At this point the economy needs to be “cooled”. Apparently, the government wants to raise taxes, reduce state budget spendings, to raise interest rates.

This policy is good to fight against inflation, but it also causes a problem of unemployment.

 

The Policy of Expansion

 

This is exact opposite policy - its aimed to expand the demand. This is relevant when the country is in a stage of through. Stimulating spendings, government tries to make the production flourish. They want to raise the output level.

Main instruments are: decreasing interest rate, rising wages, stimulating investments.

The Policy of Expansion creates conditions for economic growth and lowers the unemployment rate but at the same time it threats by rising prices which can lead to inflation.

 

The Great Depression

 

Historians most often attribute the start of the Great Depression to the sudden and total collapse of US stock market prices on October 29, 1929, known as Black Tuesday. However, some dispute this conclusion, and see the stock crash as a symptom, rather than a cause of the Great Depression. Even after the Wall Street Crash of 1929, optimism persisted for some time; John D. Rockefeller said that "These are days when many are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will again." The stock market turned upward in early 1930, returning to early 1929 levels by April, though still almost 30% below the peak of September 1929. Together, government and business actually spent more in the first half of 1930 than in the corresponding period of the previous year. But consumers, many of whom had suffered severe losses in the stock market the previous year, cut back their expenditures by ten percent, and a severe drought ravaged the agricultural heartland of the USA beginning in the summer of 1930.

By mid-1930, interest rates had dropped to low levels, but expected deflationand the reluctance of people to add new debt by borrowing, meant that consumer spending and investment were depressed. In May 1930, automobile sales had declined to below the levels of 1928. Prices in general began to decline, but wages held steady in 1930; but then a deflationary started in 1931. Conditions were worse in farming areas, where commodity prices plunged, and in mining and logging areas, where unemployment was high and there were few other jobs. The decline in the US economy was the factor that pulled down most other countries at first, then internal weaknesses or strengths in each country made conditions worse or better. Frantic attempts to shore up the economies of individual nations through protectionist policies, such as the 1930 U.S. SmootHawley Tariff Act and retaliatory tariffs in other countries, exacerbated the collapse in global trade. By late in 1930, a steady decline set in which reached bottom by March 1933.

US Unemployment rate

The List of Used Literature

 

  1. П.В. Круш, С.О. Тульчинская "Макроэкономика"
  2. Tim Taylor “Principles of Macroeconomics”
  3. Kitchin, Joseph "Cycles and Trends in Economic Factors", 1923
  4. http://www.english.illinois.edu/maps/depression/overview.htm

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