The theories of the business cycle chapter review

The theories of the business cycle chapter review

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Chapter Review: The theories of the business cycle chapter review

The theories of the business cycle help in understanding of the unobserved and persistent non-seasonal economic fluctuations. The economic performance tend to vary from time to time due to various factors. There are times when the economy is at peak while other seasons where the economy is at recession. Understanding the seasonal variations is important for businesspeople since they are prepared in terms of when to experience a boom and recession. Contemporary, the main emphasis was on the instability in the investment in the fixed capital investments. Furthermore, the profitability and changes in the input and output supplies were also considered as important factors in the economic analysis. Besides, mathematical explanations have been used in deriving better understanding of the business cycles in the real world experiences.

The Keynesian literature played an important role in the development of fiscal policies. The theory helped in explaining seasonal changes in the economic performance including inflations. Besides, understanding the diversity in the business cycles is also important for the investors. There is clear evidence of the persistence of the business cycles; though, some may go unnoticed. The fluctuations in the business cycles can also be evident in terms of the period it takes to move from the peak to the trough season. As a result, economists developed various approaches of maintaining the economic performance at a fairly stable state. Some of the measures include shifts in the employment to less cyclical, enhancing the role of automatic stabilizers, reduction in the frequency and intensity and the development of the favorable fiscal policies.

Other significant developments have also been witnessed in the economic and business cycles explanations. The general trends that have emerged include the increased emphasis on the importance of the aggregate supply, great emphasis and maintenance of the competitive market cleared through the relative changes and lastly, the adoption of the rational expectation hypothesis. Incorporation of the various elements in the economic analysis helps in understanding the role of the changes in the business environment to the business cycles. The approaches used in operating businesses in the past are significant different from the modern techniques and this could also explain the changes in the business cycles. The changes in the consumer demand may not correspond accordingly to the changes in the price, output and cost. Therefore, exploring the historical performance helps in deriving the trends and predictability in the economic performance. Though it may be difficult to explain the business cycles, understanding the underlying factors associated with the phenomenon is important.

Chapter 2 explores the recent work on business cycles in historical perspective. The interest in the business cycles assumes the wavelike movement characterized by waxing and depression. In understanding the definition and application of the business cycle, various theories have been developed. The theories have also been updated and even revised to assume all the factors affecting economic performance. With reference to the peacetime expansion in the United States, it is evident that it lasted for about 3 years and it had about 10 cycles. The business phase and cycle vary over time; however, for the projection purposes, the central tendencies are used in estimating the possible duration taken within a cycle. For example, table 2.1 shows the average duration of the business cycles in the United States since 1854 to 1982. Using the average values gives the most likely number of expansions and contractions likely to be encountered in a cycle.

Not all business organizations experience the expansions and contractions at the same proportion. Some organizations merely experience the reduced growth and not the absolute decline as may be evident in other cases. This may be due to the different economic and financial policies used by the various companies. The effectiveness of the policies determine the vulnerability of a firm to the expansions and contractions. However, the concept of business cycle is based on the fact that the experiences in the business environment tend to vary from time to time. For large economies dominated by the local market productions, the business cycles are only affected by the internal factors such as the changes in the spending on durable goods. It is commonly presumed that prolonged low period in the business cycle result on significant business deterioration. This could be true, though, the slowdown in the business activities could act as a leverage factor to the inflationary excess demand resulting from the preceding boom and this is evident in the economic events witnessed between 1951 and 1952 as well as 1966 and 1967.

The facts and factors in the modern evolution of the U.S economic fluctuations in chapter 3 widens the understanding of the role of the business cycles especially in regard to the GDP changes with time. The GDP value of a nation is its measure of the economic viability. Therefore, the GDP value is likely to fall during the troughs and increase during the peaks. The standard deviation in the contraction and expansions estimate the variability in terms of the length and interval of the peaks and troughs in a business cycle. Furthermore, a significant indicator evident in the U.S economy was the positive changes in the federal surplus were evident during the expansion. However, while the expansion is characterize by vibrant economic activities, there are also rises and falls in the active components. On the other hand, it was surprising to note that the U.S nominal GNP continued to increase even during the recession of 1970-82. This paves a way for further exploration of the role of the business cycles in the GNP and GDP values.

The theories of the business cycle chapter review 

                                                                                         Average Measure of Phase and Cycle Duration

(Years, T to T)

No. of Business Cycles Covered Expansion Contraction Full Cycle (T to T)
Mean sD Mean SD Mean SD
1854-97 10 27 9 24 17 51 24
1897-1933 10 23 10 20 10 43 10
1933-82 10 49 27 11 3 60 26
1933-82, excl. wars 7 37 15 11 4 48 14
1954-1982 30 33 20 18 12 51 22
1954-1982, excl. wars 25 27 11 19 13 46 16
1980-1990   92   24   126  
1954-2009 33 104   38   56  

The theories of the business cycle chapter review

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