The Business Cycle

The
business
cycle or
trade
cycle is
a permanent feature of market economies: gross domestic product (GDP)
fluctuates as booms and recessions succeed each other. During a boom,
an economy (or at least parts of it) expands to the point where it is
working at full capacity, so that production, employment, prices,
profits, investment and interest rates all tend to rise. During a
recession, the demand for goods and services declines and the economy
begins to work at below its potential. Investment, output,
employment, profits, commodity and share prices, and interest rates
generally fall. A serious, long-lasting recession is called a
depression or a slump.

The
highest point on the business cycle is called a peak, which is
followed by a downturn or downswing or a period of contraction. The
lowest point on the business cycle is called a trough, which is
followed by a recovery or an upturn or upswing or a period of
expansion. Economists sometimes describe contraction as ‘negative
growth’.

There
are various theories as to the cause of the business cycle. Internal
(or endogenous) theories consider it to be self-generating, regular,
and indefinitely repeating. A peak is reached when (or just before)
people begin to consume less, for whatever reason. As far back as the
mid-nineteenth century, it was suggested that the business cycle
results from people infecting one another with optimistic or
pessimistic expectations. When economic times are good or when people
feel good about the future, they spend, and run up debts. If interest
rates rise too high, a lot of people find themselves paying more than
they anticipated on their mortgage or rent, and so have to consume
less. If people are worried about the possibility of losing their
jobs in the near future they tend to save more. A country’s output,
investment, unemployment, balance of payments, and so on, all depend
on millions of decisions by consumers and industrialists on whether
to spend, borrow or save.

Investment
is closely linked to consumption, and only takes place when demand
and output are growing. Consequently, as soon as demand stops growing
at the same rate, even at a very high level, investment will drop,
probably leading to a downturn. Another theory is that sooner or
later during every period of economic growth – when demand is
strong, and prices can easily be put up, and profits are increasing
employees will begin to demand higher wages or salaries. As a result,
employers will either reduce investment,
or
start
to lay off workers,
and
a downswing
will begin.

External
(or exogenous) theories, on the contrary, look for causes outside
economic activity: scientific advances, natural disasters, elections
or political shocks, demographic changes, and so on. Joseph
Schumpeter believed that the business cycle is caused by major
technological inventions(the steam engine, railways, automobiles,
electricity, microchips, and so on), which lead to periods of
‘creative governments beginning their periods of office with a
couple of years of austerity programmes followed by tax cuts and
monetary expansion in the two years before the next election.

2.
Complete the sentences using the words given below.

recovery,
peak, trough, economic growth, GDP, business cycle, recession

1)
Recurrent rises and falls in real GDP over a period of years is
called the ___________.

2)
A ________ is officially defined as two consecutive quarters of real
GDP decline.

3)
_________ is the increase of per capita GDP: it is measured by the
annual percentage change in real GDP in a nation.

4)
_________ of a country is defined as the total market value of all
final goods and services produced within a country in a given period
of time.

5)
The phase of the business cycle during which real GDP reaches its
maximum after rising during a recovery is called a ________.

6)
A _______ is a phase of the business cycle during which real GDP
reaches its minimum after falling during a recession.

7)
An upturn in the business cycle during which real GDP rises is called
a ________.

3.
Complete the statements choosing the right option.

1)
The _______ phase of the business cycle follows a recession.

a.
recovery

b.
contraction

c.
peak

d.
trough

2)
The upper turning point of a business cycle is a _________ .

a.
boom

b.
trough

c.
peak

d.
expansion

3)
A recession is a business contraction lasting at least________ .

a.
one years

b.
six months

c.
three months

d.
one month

4)
A serious, long-lasting recession is called a ________ .

a.
boom

b.
depression

c.
growth

d.
contraction

5)
Technological advances, natural disasters, elections are _______
factors causing the business cycle.

a.
internal

b.
endogenous

c.
exogenous

d.
demographic

4.
Answer the questions on the text.

1)
What is the business cycle?

2)
What phases of the business cycle are generally identified?

3)
What economic indicators are taken into account when estimating the
phase of the business cycle?

4)
What theories of the business cycle does the text review?

5)
How do internal theories view the business cycle?

6)
What factors are considered important in external theories?

7)
Which of the various theories of the business cycle mentioned in the
text do you find the most convincing?