The business cycle or economic cycle refers to the fluctuations of economic activity about its long term growth trend. The involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or
recession). These fluctuations are often measured using the
real gross domestic product. Despite being named cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern.
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Repetitive cycles of economic expansion and recession. The official peaks and troughs of the U.S. cycle are determined by the National Bureau of Economic Research in Cambridge, MA.
the seemimgly inevitable continuous growth and decline (peaks and troughs) of the economy (see the accelerator principle).
More or less regular swings or wave-like fluctuations in the pace of a country's
economic growth , well above and well below the long-term trend in the growth rate of total production; the ups and downs of overall business activity, as evidenced by surges and declines in
GNP and
GDP ,
unemployment rates , and the
general price level ; the boom-and-bust pattern of
recession (or depression) and recovery. In older economic literature (and still today in British usage) the term "trade cycle" is often used as a synonym for "business cycle."
What causes business cycles has been one of the hottest and longest running theoretical debates in political economy. There is a fair amount of agreement on what at least some of the factors are that are associated with the alternation of economic booms and busts, but different schools of thought differ considerably in the relative weight and the causal priority they assign to these various factors. Some schools of thought emphasize uneven government economic policies as the principal cause of business cycles, while others see government economic policies as the key influences working to even out business cycles allegedly brought on by inherent features of the market economy.
Nearly all of these competing theories key in on one or more of the factors believed to influence the expansion and contraction of
total saving by the public and of
new capital investment undertaken by business firms as the most immediate causes of booms and busts in the larger economy.
John Maynard Keynes's explanation of the business cycle emphasized periodic shifts in the public's allocation of their incomes between current spending for immediate consumption and
savings for future consumption -- which leads to shifts in the
overall level of demand for consumers' goods, which in turn encourages producers of consumers' goods disproportionately to expand or contract their own purchases of producers's goods like
raw materials and machinery (and
labor ) more or less all at once in response to improvements or declines in their current sales. Keynes believed that the public typically tends to save too much and consume too little, thereby throttling
aggregate (total) demand , unless the government steps in from time to time through its
fiscal policies to artificially increase
aggregate demand by spending more on goods and services than it takes away from consumers' purchasing power in
taxes ("running a
budget deficit ").
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