The economic cycle is a recession and rise, repeated over a long period in the economic activities of people. Let us consider such gaps in more detail to understand their specifics.
Criteria in the economy
The main types of economic cycles can be divided into four phases. In the classic model of the cycle, specialists include: crisis, depression, recovery, recovery.
Each of them has its own specific qualitative and quantitative parameters, specific features.
All types of economic cycles are characterized by volume indicators: gross domestic product, national income, as well as gross national product.
The division of intangible material production into phases is carried out taking into account four phases.
The reasons for the economic cycles explain the imbalance in the consumer market.
Specificity of oscillations
In modern economic science, there are about a thousand different cycles. Basically, they are classified by the duration of the course. What phases of the business cycle do they distinguish? Short-term consider those periods, the duration of which is from 3.5 to 4 years. Cycles that do not exceed 10 years are determined as medium-term, and those cycles that occur with a frequency of 55 years are considered long-term periods.
Kitchen Cycles
Such short-term cycles of economic development consist in changing material stocks. Violation occurs, then the restoration of equilibrium in the consumer market. With the help of Kitchen cycles, one can explain the gap between investments and the use of new means of labor that contribute to the restoration of the equilibrium balance. Many modern economists who support the idea of short-term economic cycles consider them to be an integral part of the system that forms the model of the economic cycle.
Between phases there may be differences in intensity and duration, but all cycles necessarily go through the same phases.
Structural scheme
The main economic cycles begin with a boom. In this phase, there is an annual increase in national income, a reduction in unemployment to a minimum. With the rise, an increase in the size of real capital and investments is observed. At this time, the economic cycle indicators are stably high. Gradually, the favorable period is slowing down, the reasons may be increased investment and consumer price increases, as well as an increase in interest rates.
The growth phase is ending with a boom, characterized by high employment, and an increased wage rate. Due to the high price of funds, real investments in production practically cease, therefore employment is significantly reduced, output is reduced.
Lower consumer demand leads to lower prices for services and goods. At this time, investments may have negative indicators, as firms do not make new capital investments. Due to the serious losses incurred by companies, many industries are being reduced and closed.
Such economic cycles in the economy cause a state of complete repression. As soon as the level of production decline reaches its maximum value, unemployment becomes a mass phenomenon. Only the strongest companies survive in such conditions. They manage to accumulate powerful potential for subsequent growth.In the case of low interest rates, the level of investment increases. It will take a certain period of time for the economic cycle to begin to rise. We'll have to be patient so that the invested resources will bring real income.
The considered economic cycle is a demonstration of the classical transition from one phase to another. The duration, as well as the depth of each component of the cycle, have serious differences. For example, in the increasing wave of the Kondratiev cycle, there may be short and medium sections with a long and intense rise, a short decline.
Not in all cases, macroeconomic indicators in the cycle are similar to those described above. In many situations, there is an increase in unemployment, a drop in production, and a rise in prices. A similar option is called stagflation; this is characteristic of a period that characterizes sharp changes in the economy.
The modern economic cycle can be caused by various phenomena: the level of solar activity, military coups, revolutions, population growth, price shocks, investor sentiment, low energy use, technical innovations. How does the economic cycle depend on them? Factors can be combined into a mismatch between supply and demand, size of production and total cost.
Cyclic features
Several aspects can be used to explain the cyclical nature of the formation of the economy. First of all, as the factors that cause such a development, experts call the change in demand for aggregate supply. The concept of the economic cycle is also associated with an increase or decrease in aggregate supply in a constant indicator of consumption or demand. For example, economic cycles that are caused by changes in consumption or aggregate demand.
The boom phase is determined by the beginning of a situation where manufacturers have no opportunity to sell their products, that is, their total costs are clearly below the release. Such a situation leads to the appearance of an excess of unsold goods in the warehouses of enterprises. As a result, production is limited, which becomes the main reason for layoffs and an increase in the number of unemployed employees.
Analyzing the concept of the economic cycle, it should be noted that with a decrease in demand for durable goods, as well as a decrease in companies' demand for investments, there is a sharp decrease in short-term interest rates.
In such conditions, there is an increase in the long-term rate due to bond sales as part of a decrease in income and a lack of cash resources.
Due to a decrease in total income, a decrease in tax revenues to the state budget is observed, as a result of which the cost of transfer state payments increases, and a state budget deficit arises.
Ways to resolve the problem
Any dynamics of the economic cycle involves changes in the state budget, stimulates the desire of companies to sell their products at lower prices, which contributes to the manifestation of deflation. Enterprises are faced with a situation in which products cannot be sold even at low prices. In order to cope with this situation, there are several options.
It is necessary to clearly analyze the main causes of economic cycles in order to choose the best method.
For example, a company may purchase equipment that has greater productivity, as a result of which it will be possible to produce products with lower material costs. The company will be able to lower the cost of production, while reducing profit margins. In addition, the company has every opportunity to establish the release of a new type of product, involving modernization.In both situations, there is a chance of increasing demand for investment goods, which will shape production in those industries that produce investment products.
As a result of such a recovery, employment will increase, production profit will increase, and total income will grow. This situation leads to an increase in demand in those sectors that produce consumer goods, and stimulates the expansion of the production of these products.
During this period, the economic cycle is a way of transition to the recovery phase. Along with an increase in demand for durable goods, an increase in investment, there has been an increase in the cost of credit, that is, an increase in short-term interest rates. With a decrease in long-term interest rates, a simultaneous increase in the value of securities occurs, interest in bonds grows, tax revenues to the budget increase, transfer payments decrease. At this stage of the cycle, the state budget deficit decreases, additional free resources (surpluses) appear.
In such a situation, the state’s legal capacity is restored, at this time the economic cycle is an option of transition to the stage of overheating of the economy. Investments are the main factor that affects aggregate demand.
Big business cycles
They, according to the theory developed by the Russian scientist Kondratiev, cover a period of 45 to 60 years. He analyzed the statistics: salary, price work, foreign trade, steel production, cast iron. Cycles are synchronized, closed, there is a relationship between them. For example, the cyclical nature of investments is associated with pricing policies, the processes of compensation of basic capital.
Kondratiev proved that cycles represent the restoration and violation of the economic balance of a long time period. He believed that the main cause of the cycle is the accumulation and dispersion of stocks, which is enough for the formation of innovative productive forces.
Before the beginning and at the first stage of a large cycle, serious changes in equipment occur, stimulate a sufficient number of inventions and technical discoveries, participate in commercial international relations of new countries, modernize currency circulation and gold mining. Due to the fact that each large cycle has an upward wave, which is characterized by wars and revolutions.
That is why at this time there was a sharp depression in agriculture. Confirmation of Kondratiev’s theory can be considered a deep crisis of the thirties of the last century, when there was a downward wave of a large cycle that arose at the end of the nineteenth century.
Features of countercyclical regulation
Different views on the causes of cyclic fluctuations are associated with different approaches to their regulation. Economists identify several different points of view, but they can be reduced to two main approaches: classical and Keynesian.
Keynes fans believed that aggregate demand plays a central role in regulation. Proponents of the classic proposal are convinced that countercyclical regulation consists of a combination of options for influencing economic activity and the situation, aimed at reducing cyclical fluctuations.
All efforts of the state are aimed at overcoming the cyclical nature of economic development, searching for opportunities to create and maintain economic balance and stability. One must accept and realize the cyclical nature, otherwise the risk is high that the state will fall into a situation of a serious economic crisis.
With timely recognition and acceptance of cyclicality in the crisis phase as the inevitability of creation and destruction, it assumes the achievement of a macroeconomic balance, stimulates the renewal of the economy of the national economy.
Keynesian fans are guided by the aggregate demand, which is based on the government performing a regulatory function based on the use of fiscal instruments. For example, the government expands or tightens the taxation system, carries out manipulations with tax rates.
In such a situation, monetary policy plays a role, allows the state to carry out activities aimed at overcoming the crisis and depression. For example, additional costs are included to prevent "overheating" of the economy, smoothing the transition from the process of recovery to the stage of decline.
Proponents of the conservative trend believe that it is important to use the available resources, create conditions for efficient production, abandoning inefficient sectors and sectors of the economy, providing complete freedom for the operation of the market structure.
Currency Regulation Tool
As the main instrument of action on the national economy, ways to influence inflation become money. The main focus is not on liberalization of credit restrictions, but on the use of fiscal policy. The rigidity of the policy consists in a significant reduction in all government spending, lower consumer demand.
The essence of tax policy is to reduce the size of tax rates, as well as to apply a progressive scale. Countries that have a market economy, regardless of which model the government chooses, are forced to use ways to influence economic activity, the market, to solve short-term and long-term tasks in the national economy.
Features of economic cycles
Most of the indicators used in the economy are dynamic parameters. For any country in which a market economy exists, cyclicality is characteristic.
With its help it is possible to characterize the economy of an individual production, industry, country, to predict the possibility of progress or regress. Fluctuations are irregular, so it is so important to conduct statistical research in a timely manner, to predict possible changes in the economy.
The economic cycle is often called the "business period", since it implies a change in various economic indicators over a certain time period.
The knowledge and experience that accumulate during the existence of the company, allow the company to develop, get the desired profit. Marketing research aimed at analyzing the consumer market, makes it possible in a certain period of time to replace one product with other types of goods. Competition, which has a significant impact on changing demand for products, is also associated with the cyclical nature of the economy.
At each phase, certain changes are observed in sales volumes, stockpiling of goods, and a change in interest in the products offered by ordinary consumers.
When observing a situation in the market characterized by a steady drop in demand, companies can cope with the problem of falling sales revenue by using several methods. The first option is related to the introduction of innovations in the marketing program, for example, updating the design of product packaging, production of an analogue that is distinguished by a favorable price. In addition, a company can invest production assets in cash using the cyclical nature of the economy.
Depending on the specifics of the enterprise, significant differences are possible between the duration of each economic cycle. Each phase is affected by the complexity of the production process, the amount of equipment used, the need for energy-intensive technologies.
To calculate the duration of each cycle, you must have information about the duration of the process chain, the total time of breaks.You also need to consider those time costs that are associated with the sale of finished products. When summarizing all the indicators obtained, we can talk about the duration of the production process, analyze the cyclical nature of the economy.
With short cycles, the risk of costs in the company increases significantly, as you will have to constantly look for additional sources of financing. The cyclicality of the company's operational work can be calculated using information on the maturities of receivables.
The life cycle in the economy is a sequence of stages of formation through which the company must go in order to achieve the desired stability in development.
Conclusion
Cyclicity is observed not only in the economy. Life cycles explain evolution in the biological world, and historical cycles provide insight into certain events. Despite the fact that there are certain differences between them, the general essence has similarities. Due to the fact that in each cycle there are certain phases, there is a change in the economy, the development of society, life continues.