Business Cycle Definition and Types

Wed, 06/27/2012 - 09:37 -- Umar Farooq

Definition of Business Cycle Or Trade Cycle

Mitchell defined the business cycle (trade cycle) as a fluctuation in aggregate economic activity, Business cycle is also known as trade cycle. In the study of economic activity, four types of economic changes or fluctuations can be distinguished:

  • Trends
  • Seasonal
  • Irregular or random
  • Cyclical

Trend

Trend is the overall directional movement in the economy over an extended period of time, 30-50 years.

A line representing the trend usually shows an upward or downward movement. The trend shows average growth or decline over a period of time.

Seasonal Variation

These are fluctuations in economic activity during a given period, usually a year. Changes in agricultural production and employment are caused by weather. Weather also causes change in the production of construction, coal and dockyard workers. Customs and convention may encourage more purchases in Ramadan, Holi and other religious and culture activities. Such fluctuations are caused by artificial and conventional forces.

Irregular Fluctuation

These are changes in business activity resulting from some unexpected or unusual event. Such factors are floods, drought, earth-quake, locust invasion, wars, pestilence, fire, strikes, political disturbances, a change in the currency, a rapid increase in population or the passage of certain types of legislation—all those which can affect the economy as a whole.

Cyclical Fluctuations

These are fluctuations in the level of business activity that would come about even though there were not trend, seasonal or irregular factors. (Cycles are caused by forces within economy itself). The economy operates in such a way that it tends to accelerate at times, but in so doing it builds up the forces which will eventually bring about a deceleration in the economy.

Since the seasonal and cyclical fluctuations occur periodically they are said to be recurring rhythmic changes. Seasonal fluctuations have a fixed regularity, while the cyclic occur irregularly.

Types of Business Cycles

The capitalist economy has passed through numerous business cycles. Following are the types of business cycle

  • Major cycles
  • Minor cycles
  • Long-wave cycle

Major Cycles

These are wide oscillations of business activity and are characterized by serious depression, seven different business cycles were seen during 1870-1937.

Minor Cycles

These are of relatively mild intensity characterized by downward movement. Between 1947.1983 rapid economic growth was four times interrupted by minor, mild downswing. (1980-83 recession threatening end into a slump as some economists say).

Long Waves

Long waves business cycles or trade cycles are of 50 to 60 years duration. The upswing period of the long-range cycle can contain several minor and even major cycles. The primary element in long wave business cycle is the price movement.