Business Cycle

Business Cycle and Its Effects on Consumers

The success of a business venture or investment rests on the investor’s ability to foresee or predict the business setting in the future. From financial analysts to small businesses, learning the trend is very important because this will allow them to make adjustments in their decisions on how to improve their businesses. Without any type of prediction, their efforts could be immediately negated since they did not anticipate any outside factors that could affect their business. Even with market research of the present demand and inside preparation, any form of prediction or research for market demand in the upcoming months or years is important for business survival.

In a larger setting, businesses and analysts have to be aware of the fluctuation of the country’s economy. Even consumers have to be aware of the cycle so that they could prepare for future financial challenges. But even with the fluctuation, businesses and consumers have to be conscious that the economy will likely pick-up after some factors that could improve the economy is placed.

The stages wherein the country’s economy goes through rough and feasible periods are referred to as business cycle. As the country goes through various stages of the cycle, a unique financial standing is experienced. Because the status varies in different stages, analysts and businesses have to learn when the economic climate change to properly adjust their future decisions.

Time Based Business Cycle

Modern economists do not point out the specific time frame for business cycle. However, early theories on business cycle attempt to create an estimated time frame so that analysts should be able to create specific business plans in the future.

Kitchin Inventory Cycle

Developed during the 20s by Joseph Kitchin, this is a business cycle that’s largely based on information dissemination. Kitchin believes that the cycle exists because there is a lag of streaming information from manufacturers, sellers and consumers. His time period is only from three to five years and a business could experience economic downturn because there is an excess of manufacturing even with limited demand. Until everyone is updated with inventory, recovery will not be achieved.

Fixed Investment Cycle

Clement Juglar developed the 7-11 years of business cycle based on fixed investment. His theory is based on the ability of fixed investment to accumulate earnings over the years since it was purchased. The cycle involves purchasing of a fixed investment and slowly gaining earnings which eventually pushes for recovery as investments on fixed properties have been recouped.

Kuznets Swing

Lasting from 13-15 years, Simon Kuznets developed this theory as he studied immigration. He was able to relate the changes of economy stages with the increase and decrease of migration. Economists have expanded this interpretation to investments which further explains how would a country experience economic downturn and eventual recovery.

Kondratiev Wave

Lasting from 45 to 60 years, this type of business cycle is not just a movement from prosperity, recession and recovery. The theory was developed by Nikolai Kondratiev and was first presented in his book published in the mid-20s. The target of this type of business cycle is to create a general description on how a country develops through different industries from the past to the present.

Business Cycle Stages

Traditional business cycle comes in five stages:

1. Growth – a period wherein the country experience rapid economic improvement. This is largely due to the renewed interest in investment and improved way of living which also helps in increasing demands for certain products from different industries.
2. Peak – as the country experiences rapid development, expansion is experienced in different industries. But as consumers also improve their way of life and eventually gaining everything they require, the demand will experience a peak. This is basically a point where the country experiences its best economic standing.
3. Contraction – Once the economy has reached its peak, the demand and expansion for businesses slows down. This is the period wherein business activity slows down and consumers try to maintain the demand. However, this is not necessarily the situation as some businesses will experience downturn because the demand slows down. Eventually businesses will experiences losses.
4. Trough – the slowdown of business activity could lead to something worse. The lowest point of business development of any country is referred to as the trough in the business cycle. This is also called the country’s recession. Since the demand for specific products are low, the country cannot move economically.
5. Recovery – trough or recession will eventually force the consumers and businesses to seek remedies for their economic setting. With the aid of the government, recovery will be eventually achieved. This sets up another set of cycle as the country’s economy will slowly experience growth due to dedication to investments and other economic positions with the aid of the government.

Modern Interpretation of Business Cycle

The business cycle with timeframe is necessarily applicable nowadays because the economic downturn could last longer than its recovery or peak. The difference between the contraction and growth is now smaller in terms of financial output. But this doesn’t mean that the business cycle is no longer applicable. In fact, it is a constant reminder for the government and businesses that recession will eventually happen. But instead of letting it happen without doing anything, the government is setting up different agencies to limit the effect of recession on its consumers. The business cycle is a reminder for the government that they should be constantly prepared for different economic situations.