Very Short Question Answer

1.  Define the business cycle.

Business cycle is defined as the regular upward and downward fluctuation in aggregate economic activities in the economy. It is also known as trade cycle and it is the special feature of capitalist economic system.

2. What are the various phases of trade cycle?

The phases of trade cycle are as follows:

  • Depression
  • Recovery
  • Prosperity
  • Recession
3. Make a list of characteristic of business cycle.

The characteristic of business cycle are as follows:

  • Cyclical nature
  • Regularity
  • Economy-wide phenomenon
  • Wave like movement
  • Self enforcing or cumulative.
4. Point out important types of business cycle.

The important types of business cycle are as follows:

  • Juglar cycle
  • Kuznets cycle
  • Building cycle
  • Kitchin cycle
  • Kondratieff cycle
5. What do you mean by prosperity phase of business cycle?

Prosperity phase of business cycle is that phase which emerges after recovery and in this phase all macroeconomic variables increase and become high.

Short Question Answer

1. Define business cycle. What are its different types?

Trade cycle is defined as the upward and downward movements or fluctuations in aggregate economic activities such as output, employment, income, price, rate of interest, demand etc. In general trade cycle created in one sector, fully affects the whole economy. It is also regarded as the feature of capitalist economic system. There are four phases of business cycle: prosperity phase, recession phase, depression phase, and recovery phase.

The different types of business cycle are as follows:

i. Juglar cycles: This cycle named after French economist ‘Juglar’ in nineteenth century is also known as the long-run cycle or major cycle. The time period of this cycle is around ten years.

ii. Kuznets cycle: This cycle was propounded by American economist, Simon Kuznets. The time period of this cycle is from 16 years to 22 years.

iii. Building cycle: Building cycle is related to the construction works. The time period of this cycle is about 18 years.

iv. Kitchin cycle: This type of business cycle was propounded by British economist Joseph Kitchin. This is a short-run or minor cycle. The time period of this cycle is about 40 months.

v. Kondratieff cycle: The long-term or long wave cycles propounded by Russian economist N.D. Kondratieff in 1925 AD is known as Kondratieff cycle. It is also known as the long wave cycle. The time period of this cycle is 50 years to 50 years. In this time period many short cycles are included.

2. What do mean by business cycle? Explain its characteristics.

Please refer to Q. No. 1.

Business cycle refers to the alternating periods of expansion and contraction in the aggregate economic activities. These regular and continuous changes in the economy are the features of business cycle. However, not all type of changes can be termed as the business cycle. Only regular and continuous changes come under the business cycle. Based on these facts, the main characteristics of business cycle are as follows:

i. Cyclical nature: The nature of business cycle is generally cyclical. It means L that there is repetitive and recurrent pattern of ups and downs fluctuations of aggregate economic activities.

ii. Regularity: Some of the economists have given the view that there is regularity or periodicity in the fluctuation of the business cycle. The stages of prosperity and depression occur and complete in fixed period.

iii. Economy-wide phenomenon: A business cycle is an economy-wide phenomenon. When depression sets in the industrial sector, it cannot be restricted there. Soon, it spreads to other sectors like agriculture, business and transport etc. So is the case during boom.

iv. Wave like movement: A business or business cycle shows a wave-like fluctuation in the economic activities. The expansion or prosperity is followed by a depression and so on.

v. Self-enforcing or cumulative: Once cyclical movement starts in one direction, it tends to feed on itself. The forces of the economic crisis tend to increase Once the prosperity phase starts, it tends to run out the control of policy makers.

vi. International: The nature of business cycle becomes international. Business cycle starts from one section of the economy and expands throughout the country. Then, through the international business, it expands from one country to another.

vii. Feature of capitalist economy: Business cycle emerges from the capitalist economy because the government of the capitalist economy does not control each and every sector of the economy. But in the socialist economy government has full control over all sector of the economy. Therefore, the influence of business cycle is not seen in such countries as it is seen in the capitalist countries.

viii. Unequal effects: A business cycle affects different sectors of the economy differently. It influences more on capital goods as compared to consumer goods.

3. What is trade cycle? Explain the prosperity phase of trade cycle.

Trade cycle is defined as the upward and downward movements or fluctuations in aggregate economic activities such as output, employment, income, price, rate of interest, demand etc. In general trade cycle created in one sector, fully affects the whole economy. It is also regarded as the feature of capitalist economic system.

Prosperity Phase of Trade Cycle emerges after recovery. This phase can also be regarded as the best phase of business cycle. During this phase of business cycle, all macroeconomic variables increase rapidly. The macroeconomic variables like national income, employment and price level rise at a high level. The factors of production also remain employed or there are no idle resources. This means that full employment of labour force and full utilization of productive capacity are realized in the prosperity phase. As a result, business parties and entrepreneurs will earn maximum profit. More labours will be required for. higher level of production. This will bring about the state of full employment. Keynes has said that in such a situation voluntary unemployment remains but the number will be very small. The purchasing power of people will increase as well as new and improved machineries will be used in the industries.

In this stage, profit margin increases because price level rises faster than the cost of production. Because of high profit margin, producers will produce excessive quantity. This will cause scarcity of labour and raw materials leading to the rise in cost of production. This ultimately leads to rise in price. Due to rising price, real wages of labour will decline. Their consumption will also decline slowly due to decline in real income. So the business firms will reduce to start their production. This will result fall in income, employment and investment. In this way, period of prosperity moves towards the period of recession.

Effects / Features of Prosperity

i. Excessive increase in the output and employment,
ii. Increase in demand, price, wages and interest rates,
iii Increase in profit margin due to excessive increase in price relative to the increase in cost of production,
iv. Excessive increase in investment and production,
v. State of optimism everywhere in the economy,
vi. Full utilization of all factors of production, and
vii. Increases in loans and bank credit.

4. What is business cycle? Explain the recession phase of business cycle.

Please refer to Q. No. 1.

In business cycle, after the phase of prosperity, the phase of recession starts. This phase starts basically due to fall in consumption of individuals and households. The main cause of fall in consumption is rise in price at the high level. When consumption declines, there will be rise in business inventory and the entrepreneurs or business people become pessimistic. So, the business organization will reduce their production and some industries will shut down. With these pessimistic situations, new investments will slow down. As a result, basic industries will suffer and they will start closing down. The labour of the industries will be unemployed. It will further impact on demand for consumer goods. Due to fall in demand for consumer goods, industries producing consumer goods are also affected. These industries slow down their output and there will be further rise in unemployment. Wages will decline and consumption further falls down. Because of all these reasons, the price level will start to fall down. Despite fall in price level, there will fall in aggregate demand in the economy.

During the recession, the banking system will also be affected. Because of fall in investment, bank credit will decrease. This will result fall in interest rate but the fall in interest rate will have no any positive effect on investment, rather it will continuously decrease. In such situation, negative multiplier will be active in the economy which will have cumulative effect on cycle, economy will enter to depression.

Effects / Features of Recession

i. Fall in employment, output and income,
ii. Fall in price level,
iii. Fall in aggregate demand,
iv. Fall in profit margin,
v. Fall in bank credit supply and demand for bank credit, and
vi. Pessimism all around the economy

5. What is trade cycle? Explain the depression phase of trade cycle.

Please refer to Q. No. 1.

Depression is the most critical and fearful stage of a business cycle.. In this phase, all economic activities are far below the normal rate of growth. The level of price, credit, wages, profit, production, employment etc. are at low level. There are also business failures. Hence, the weak firms are compelled to leave the business.

In the state of depression, there will be unfavourable situations everywhere in the economy. Since the prices of goods and services are in a decreasing state, the investors are discouraged to invest. Due to the less investment, output and employment will decrease. So in this phase of business cycle, the business will be in very poor condition. The wages of labour also decreases as a result of decrease in investment. Due to fall in price level, the purchasing power of money will increase. Despite increase in purchasing power of money, purchasing power of people will be very low due to high degree of unemployment.

During depression, industries producing capital goods are affected more than the industries producing consumer. goods. Due to decrease in price of raw materials used by manufacturing industries, farmers are also affected. There is also great decline in construction and construction industries. Because of all these reasons, there is pessimism all round. The different forces become self reinforcing and depression reaches to trough in extreme. Trough is the lowest point of business cycle or business activity. Such depression was experienced by the world during 1929-1933. During this period, about one forth of labour force was unemployed and economies affected by depression were producing far below their potential level.

Effects / Features of Depression

⦁ Decrease in output (production),
⦁ High degree of unemployment and low level of income,
⦁ Decrease in demand and fall in price level,
⦁ Excessive decrease in price of raw materials and agricultural output,
⦁ Decrease in credit demand due to decrease in investment,
⦁ Decrease in rate of interest and increase in bank liquidity.
⦁ Decrease in construction, works, and
⦁ State of hopelessness or pessimism everywhere in the economy.

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