- Depression
- Recovery
- Boom
- Recession
The upward phase of business cycle is categorized into two stages - recovery and boom. While the downward phase is also divided into two stages - recession and depression. The detail of phases of business cycle is following.
Depression Phase
Under depression the economic
activities fall considerably. Production, employment, demand, profit and income
decline. There is a reduction in consumer goods and as well as capital goods.
As demand is less so the plants are not utilized to their full capacity in
factories. Profit margins decrease sharply due to low demand. Banks are not willing to advance loans to
businesses. The confidence of
businessmen is replaced by uncertainty and they became hesitant to make fresh
investments. Even some businessmen are compelled to close down their production
and lay off workers. All sections of
people suffer under the period of depression.
Recovery Phase
It is the turning point from
depression to expansion. The economy again enters into the prosperity. The
businessmen become optimistic and make the renovation programs to come back to
the market. Banks and other financial
institutions begin to expand credit to industries. During the period of
recovery, the demand starts rising, production increases which leads to
increase income and employment. When
income of the consumers increases, it increases their purchasing power which
leads to rise demand for consumer goods. Recovery continues until the economy
returns to steady growth levels.
Boom Phase
Here the phase of recovery
gets momentum. The economy reaches to
the peak which is the highest point of business cycle. Under boom there is a
continues rise in level of production, employment, wages, aggregate demand,
profits, volume of credit, investment and standard of living. There is a large
expansion of bank credit. The high profit margins induce businessmen to enhance
their investments. The old machines are
fully utilized and as well as new machines and factories are set up which
increase demand for workers. During the period of boom, the economy is in the
position of full employment. This phase is also known as prosperity phase.
Recession Phase
When the period of boom ends,
recession begins. In the period of recession, investment, employment, bank
credit and aggregate demand starts declining. A wave of pessimism spreads and
businessmen starts losing confidence and become pessimist (Negative) about
future of business. Business expansion stops, stock market falls, credit
contracts, orders for raw materials reduced, profits decline and workers start
losing their jobs. This situation of crisis firstly faced by few industries and
slowly spread to all industries. If
recession continues, ultimately, it will turn to depression and business cycle
repeats. However, usually, recession lasts for a short period of time.
Certainly this is a good description of what happens but it fails to explain WHY it does. Is our social system unstable, so that it will forever oscillate and how can a change be made to keep it stable? Henry George provided a solution in 1879, but nobody in government is interested and we can expect the next economic crisis in 2025 according to Georgist theory.
ReplyDeleteThe economy cannot be stable. Yes, it may stable for a specific period but not forever. Because there always been change in government laws which lead to change in economic condition. The other factor is new technology. When the new technology is introduced to the market, the current products become outdated and when they are outdated, their demand starts declining. Ultimately, it goes to the situation of depression.
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