Economics For Managers
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Chapter 21 : Business Cycles
Characteristics Of Business Cycles
Theories Of Business Cycles
Multiplier-Accelerator Theory
Demand Induced Cycles
Other Theories
Forecasting Business Cycles
Employment Fluctuations
The Concept of Full Employment
Nature of and Trends in Unemployment in India
Chapter Summary
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A business cycle is a swing in total national output, income
and employment. It usually has two phases: recession and expansion. It is
difficult to predict the duration and timing of business cycles. During
expansion, production increases in all sectors of the economy and so do
employment opportunities. Some of the forces that come into play during
expansion leads to recession. The general rise in costs relative to prices is an
important factor leading to recession.
Recession ultimately leads to depression and there is substantial fall in the
production of goods and services and the level of employment. During recovery,
there will be more employment opportunities and income will go up which in turn
will lead to more demand for goods and service. There will be an upward movement
in the price, thus encouraging investment and growth in the economy. |
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There are many theories which explain the
cyclical behavior of the economy. One of the earliest such theories
is the multiplier and accelerator theory. Aggregate demand and
aggregate supply curves explain business cycles better. Shifts in
aggregate demand causes business cycle fluctuations in output,
employment and prices. The economy suffers recession or even
depression when shifts in aggregate demand cause downturns in
business. When there is an upturn in economic activities, it would
lead to inflation. Other theories concentrate on the behavior of
investors, cycles in public expenditure and the behavior of money
supply. But no single theory has successfully explained and
predicted business cycles.
Economic fluctuations can be now predicted with the help of
econometric forecasting models. The model builders use their
judgment to find out whether the results obtained are theoretically
strong. There are a number of indicators which show cyclical
movements in an industrial economy. Business forecasters in
developed economies keep a close watch on these indicators. The rate
of unemployment is one of the key indicators of the economic
conditions prevailing in an economy.
Unemployment arises from a deficiency in effective demand.
Unemployment is considered a sign of economic inefficiency.
Employment level must be raised to increase the output and give a
boost to the economy. Unemployment can be of three types:
frictional, structural and cyclical. Full employment does not mean
zero unemployment. It is the level of employment that results when
the rate of unemployment is normal. Full employment incorporates the
idea that at a given time there is some natural rate of unemployment
in an economy.
The nature of unemployment in India is mostly structural and
disguised. Structural unemployment can be eliminated only by
introducing certain radical measures. In less developed countries,
there is widespread disguised unemployment. Disguised unemployment
can be tackled by transferring surplus labor from one sector to some
other sector. This will lead to an increase in national output and
the country's capacity to save would also increase.
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