Business CyclesBroadly speaking, business cycles are a kind of fluctuations which occur in business activity with a certain degree of regularity and periodicity. According to Parkin and Bade, The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables.In other words, The business cycle or economic cycle refers to the fluctuations of economic activity about its long term growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). These fluctuations are often measured using the real gross domestic product.The Chart follows:

A business cycle is not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random and, to a large degrees, unpredictable. A business cycle is identified as a sequence of four phases: (1)Contraction: A slowdown in the pace of economic activity.(2)Trough: The lower turning point of a business cycle, where a contraction turns into an expansion.(3)Expansion: A speedup in the pace of economic activity. (4)Peak: The upper turning of a business cycle.

So far our primary task has been the development and analysis of the determination of income and output.These theories basically attempts to do no more than to explain how investment, saving and consumption interact to determine the income level.But a more comprehensive and ambitious theory must attempt to analyze the dynamics of income movement which in a free market economy pass through altering periods of expansion and contraction which is called the BUSINESS CYCLES.This theory must answer questions that arise on account of the behavior of the economy during business cycles like:

Why expansion comes to an end?Why economy moves downward?How much the economy will go down during depression?Why and how does a slump comes to an end?How a recovery begins and give rises to prosperity?

Historically, it is difficult to say when a systematic study of these and other basic question to business began. According to Schumpeter, Clement Juglar was the first to make a systematic study of business cycles by about 1860 onwards.

According to Burns and Mitchell, a normal trade cycle or business cycle consists of four closely interrelated phases:Revival, Expansion, Recession and Contraction.The revival and expansion measures peak or ceiling of the Cycle, where as, the recession and contraction measures the trough or floor of the trade cycles.Revival or Expansion: According to Prof. Haberler, an expansion or prosperity is a state of affairs in which the real income consumed, real income produced, and the level of employment are high or rising.There are no idle resources or unemployed workers.

In other words, during prosperity phase, economic affairs and activities are at the optimum level and there is no wastage of resources of any kind.The level of prices and wages are also high.But, with the passage of time, resources which are already fully employed became scares, output becomes less elastic, cost rise all these combine to boost the rising value of money.But the rise in rise level is not uniform leading to distortion in the price level.The lags and distortions bring about an end of cumulative expansion or prosperity phase of the cycle and the recession starts giving way to contraction or depression.

Types of Business Cycles:The main types of business cycles enumerated by Joseph Schumpeter and others in this field have been named after their discoverers:Juglar cycle: In the Juglar cycle, which is sometimes called "the" business cycle, recovery and prosperity are associated with increases in productivity, consumer confidence, aggregate demand, and prices. In the cycles before World War II or that of the late 1990s in the United States, the growth periods usually ended with the failure of speculative investments. In these cycles, the periods of contraction and stagnation reflect a purging of unsuccessful enterprises as resources are transferred by market forces from less productive uses to more productive uses.

(2) Politically based business cycle: Another set of models tries to derive the business cycle from political decisions.The partisan business cycle suggests that cycles result from the successive elections of administrations with different policy regimes. Regime A adopts expansionary policies, resulting in growth and inflation, but is voted out of office when inflation becomes unacceptably high. The replacement, Regime B, adopts contractionary policies reducing inflation and growth, and the downwards swing of the cycle. It is voted out of office when unemployment is too high, being replaced by Party A.The political business cycle is an alternative theory stating that when an administration of any hue is elected, it initially adopts a contractionary policy to reduce inflation and gain a reputation for economic competence. It then adopts an expansionary policy in the lead up to the next election, hoping to achieve simultaneously low inflation and unemployment on Polling Day. The business cycle is the rises and falls of the economy. This maintains neutrality between supply and demand.

(3) Preventing business cycles: Because the periods of stagnation are painful for many who lose their jobs, pressure arises for politicians to try to smooth out the oscillations. An important goal of all Western nations since the Great Depression has been to limit the dips. Example: Keynes theory of Employment, which suggests the policy of dig the hole and fill it up which create the employment for people.