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BUSINESS CYCLE

INTODUCTION: Business cycle is also called Trade Cycle. The business is never steady. There are always ups and downs in economic activity. This cyclical movement both upwards and downwards is commonly called Trade Cycle. This is a wave like movement in regular manner in business cycle. In business, there are flourishing activities, which take economy to prosperity and growth whereas there are periods when there is recession, which leads to decline in the employment, income and output. When the economy goes into downswing then there is a stage of recovery to reach a new boom. Trade Cycle is composed of periods of good trade characterized by rising price and low unemployment percentage altering with periods of bad trade characterized by falling price and high unemployment percentage. In the simple words Business Cycle is a fluctuation of the economy characterized by periods of prosperity followed by periods of depression.

MEANING The term business cycle (or economic cycle) refers to economywide fluctuations in production or economic activity over several months or years. These fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth

(an expansion or boom), and periods of relative stagnation or decline (a contraction or recession). Business cycles are usually measured by considering the growth rate of real gross domestic product. Despite being termed cycles, these fluctuations in economic activity do not follow a mechanical or predictable periodic pattern. The recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough and recovery. At one time, business cycles were thought to be extremely regular, with predictable durations, but today they are widely believed to be irregular, varying in frequency, magnitude and duration. The business cycle describes the phases of growth and decline in an economy. The goal of economic policy is to keep the economy in a healthy growth rate fast enough to create jobs for everyone who wants one, but slow enough to avoid inflation. Unfortunately, life is not so simple. Many factors can cause an economy to spin
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out of control, or settle into depression. The most important, overriding factor is confidence of investors, consumers, businesses and politicians. The economy grows when there is confidence in the future and in policymakers, and does the opposite when confidence drops.

THEORIES OF BUSINESS CYCLE: Several theories of business cycle been propounded from time to time. Each of these theories spells out the factor which causes business cycle. Before explaining the modern theories of business cycle we first explain below the earlier theories of business cycle as they too contain important elements whose study essential for proper understanding of the causes of business cycle. REAL BUSINESS CYCLE THEORY: The one which currently dominates the academic literature on real business cycle theory was introduced in their seminal 1982 work Time to Build and Aggregate Fluctuations. They envisioned this factor to be technological shocks i.e., random fluctuations in the productivity level that shifted the constant growth trend up or down. Examples of such shocks include innovations, bad weather, imported oil price increase, stricter environmental and safety regulations, etc. The general gist is that something occurs that directly changes the effectiveness of capital and/or labour. This in turn affects the decisions of workers and firms, who in turn change what they buy and produce and thus eventually affect output. RBC models predict time sequences of allocation for consumption, investment, etc. given these shocks. But exactly how do these productivity shocks cause ups and downs in economic activity? Lets consider a positive but
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temporary shock to productivity. This momentarily increases the effectiveness of workers and capital, allowing a given level of capital and labour to produce more output. Individuals face two types of tradeoffs. One is the consumptioninvestment decision. Since productivity is higher, people have more output to consume. An individual might choose to consume all of it today. But if he values future consumption, all that extra output might not be worth consuming in its entirety today. Instead, he may consume some but invest the rest in capital to enhance production in subsequent periods and thus increase future consumption. This explains why investment spending is more volatile than consumption. The life cycle hypothesis argues that households base their consumption decisions on expected lifetime income and so they prefer to smooth consumption over time. They will thus save (and invest) in periods of high income and defer consumption of this to periods of low income. The other decision is the labour-leisure trade-off. Higher productivity encourages substitution of current work for future work since workers will earn more per hour today compared to tomorrow. More labour and less leisure results in higher output today. Greater consumption and investment today. On the other hand, there is an opposing effect: since workers are earning more, they may not want to work as much today and in future periods. However, given the pro-cyclical nature of labour, it seems that the above substitution effect dominates this income effect.
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Overall, the basic RBC model predicts that given a temporary shock, output, consumption, investment and labour all rise above their long-term trends and hence formulate into a positive deviation. Furthermore, since more investment means more capital is available for the future, a short-lived shock may have an impact in the future. That is, above-trend behaviour may persist for some time even after the shock disappears. This capital accumulation is often referred to as an internal propagation mechanism, since it may increase the persistence of shocks to output. It is easy to see that a string of such productivity shocks will likely result in a boom. Similarly, recessions follow a string of bad shocks to the economy. If there were no shocks, the economy would just continue following the growth trend with no business cycles. Essentially this is how the basic RBC model qualitatively explains key business cycle regularities. Yet any good model should also generate business cycles that quantitatively match the stylized facts in Table 1, our empirical benchmark. Ryland and Prescott introduced calibration techniques to do just this. The reason why this theory is so celebrated today is that using this methodology, the model closely mimics many business cycle properties. Yet current RBC models have not fully explained all behaviour and neoclassical economists are still searching for better variations.

It is important to note the main assumption in RBC theory is that individuals and firms respond optimally all the time. In other words, if the government came along and forced people to work more or less than they would have otherwise; it would most likely make people unhappy. It follows that business cycles exhibited in an economy are chosen in preference to no business cycles at all. This is not to say that people like to be in a recession. Slumps are preceded by an undesirable productivity shock which constrains the situation. But given these new constraints, people will still achieve the best outcomes possible and markets will react efficiently. So when there is a slump, people are choosing to be in that slump because given the situation, it is the best solution. This suggests laissez-faire (non-intervention) is the best policy of government towards the economy but given the abstract nature of the model, this has been debated. A pre-cursor to RBC theory was developed by monetary economists Milton Friedman and Robert Lucas in the early 1970s. They envisioned the factor that influenced peoples decisions to be misperception of wagesthat booms/recessions occurred when workers perceived wages higher/lower than they really were. This meant they worked and consumed more/less than otherwise. In a world of perfect information, there would be no booms or recessions.

Calibration Unlike estimation, which is usually used for the construction of economic models, calibration only returns to the drawing board to change the model in the face of overwhelming evidence against the model being correct; this inverts the burden of proof away from the builder of the model. In fact, simply stated, it is the process of changing the model to fit the data. Since RBC models explain data ex post, it is very difficult to falsify any one model that could be hypothesised to explain the data. RBC models are highly sample specific, leading some to believe that they have little or no predictive power.

Structural variables Crucial to RBC models, "plausible values" for structural variables such as the discount rate, and the rate of capital depreciation are used in the creation of simulated variable paths. These tend to be estimated from econometric studies, with 95% confidence intervals. If the full range of possible values for these variables is used, correlation coefficients between actual and simulated paths of economic variables can shift wildly, leading some to question how successful a model which only achieves a coefficient of 80% really is.

MONETARY THEORY OF BUSINESS CYCLE: In the monetarist theory of business cycle the basic cause of the business cycle is because of excessive or restrictive money supply by the financial authorities and is caused by economic shocks, which are caused not by economic system failure but by external factors and excessive political and social policies of the government. That is, the business cycle is not caused by inadequate aggregate demand but by money supply in the economy and excessive government intervention or in appropriate polices to manage the economy. In essence monetarist theory explain business cycle by in appropriate monetary policy and other external factors and economic shocks and it is temporary and the rational behaviour of the market will automatically move the economy towards full employment and if government intervenes it will cause excessive inflation and will make the full employment unachievable. In addition, in their view it is also caused by rigid

labour market practices and inflexible wage fixing systems and Union power in the labour market and imperfection and anticompetitive practices in the goods market. In summary, according to monetarist the business cycle is not inherent weakness of the market economy but is caused by monetary factors and excessive government intervention in the economy or inappropriate economic and social policies of the government and rigidity in the labour market and the role unions play in the
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labour market as well as imperfections in the goods market by anti-competitive practices and over regulation of business activity by government. PURE MONETARY THEORY OF BUSINESS CYCLE: According to Prof. R. G. Hawtrey, a British economist, there is direct relationship between volume of money supply and the economic activity. Wherever there is change in the flow of money or money supply changes, there will be business fluctuations. Here, he means the credit creation by the banking system i.e., expansion in bank credit leads to demand and so the upswing of business cycle starts. On the other hand, when there is decrease in money supply through contraction of bank credit, it leads to down swing and thus leads to depression.

Expansion of bank credit happens when interest rates are reduced, which means, the loans are cheaper. Due to liberal loans, the profit margins change as they are very sensitive to the change in interest rate.

Thus, investment increases and so the employment, which in turn increase the income and demand. This increase in demand leads to increase in price and profit margins. Therefore, the upward trends start i.e., the upswing starts. But as each phase has the germs of other phase, the turning point starts. When bank changes its policy of credit expansion, the cash reserve with the
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bank reduces.

The leading rates are increased to discourage the demand for fresh loans and they start calling to return loans. The producers start disposing off their stock to repay loans. The restricted policy on credit and high rate of interest discourages a new investment, which leads to downswing. The income falls and cash starts coming back to the bank. But as the cash reserve with the bank improves, again the bank starts using liberal attitude towards credit creation and so the revival starts. This takes the economy to expansion or prosperity. According to R G Hawtrey flow of money supply is the sole cause for business fluctuations. This theory was not unchallenged. Limitations Business cycle is a very complex phenomenon and we cannot attribute it completely to credit creation by banking system. Bank plays an important role in the financing of business but it cannot be the only reason for business crisis. It can just aggravate the situation. Too much of importance is given to bank credit. Many times traders dont borrow from bank but plough back their profit. Investment not only depends on interest rates but on the rate of return also. This theory has totally ignored the non monetary

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factors like innovation, climatic conditions, psychological factors etc. COBWEB THEORY OF BUSINESS CYCLE: The cobweb model is based on a time lag between supply and demand decisions. Agricultural markets are a context where the cobweb model might apply, since there is a lag between planting and harvesting. Suppose for example that as a result of unexpectedly bad weather, farmers go to market with an unusually small crop of strawberries. This shortage, equivalent to a leftward shift in the market's supply curve, results in high prices. If farmers expect these high price conditions to continue, then in the following year, they will raise their production of strawberries relative to other crops. Therefore when they go to market the supply will be high, resulting in low prices. If they then expect low prices to continue, they will decrease their production of strawberries for the next year, resulting in high prices again. This process is illustrated by the diagrams on the right. The equilibrium prise is at the intersection of the supply and demand curves. A poor harvest in period 1 means supply falls to Q1, so that prices rise to P1. If producers plan their period 2 productions under the expectation that this high price will continue, then the period 2 supply will be higher, at Q2. Prices therefore fall to P2 when they try to sell all their output. As this
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process repeats itself, oscillating between periods of low supply with high prices and then high supply with low prices, the price and quantity trace out a spiral. They may spiral inwards, as in the top figure, in which case the economy converge to the equilibrium where supply and demand cross; or they may spiral outwards, with the fluctuations increasing in magnitude.

. The convergent case: each new outcome is successively closer to the intersection of supply and demand.

The divergent case: each new outcome is successively further from the intersection of supply and demand.

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Simplifying, the cobweb model can have two main types of outcomes:

If the supply curve is steeper than the demand curve, then the fluctuations decrease in magnitude with each cycle, so a plot of the prices and quantities over time would look like an inward spiral, as shown in the first diagram. This is called the stable or convergent case.

If the slope of the supply curve is less than the absolute value of the slope of the demand curve, then the fluctuations increase in magnitude with each cycle, so that prices and quantities spiral outwards. This is called the unstable or divergent case.

Two other possibilities are:

Fluctuations may also remain of constant magnitude, so a plot of the outcomes would produce a simple rectangle, if the supply and demand curves have exactly the same slope (in absolute value).

If the supply curve is less steep than the demand curve near the point where the two curves cross, but more steep when we move sufficiently far away, then prices and quantities will spiral away from the equilibrium price but will not diverge indefinitely; instead, they may converge to a limit cycle.

In either of the first two scenarios, the combination of the spiral and the supply and demand curves often looks like a cobweb, hence the name of the theory.
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ELASTICITIES VERSUS SLOPES: The outcomes of the cobweb model are stated above in terms of slopes, but they are more commonly described in terms of elasticises. In terms of slopes, the convergent case requires that the slope of the supply curves be greater than the absolute value of the slope of the demand curve:

In

standard

terminology

from , and

microeconomics,

define

the elasticity of supply as

The elasticity of demand as elasticises at the equilibrium point,

. If we evaluate these two

That is

and

, then we see that

the convergent case requires

Whereas the divergent case requires

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In words, the convergent case occurs when the demand curve is more elastic than the supply curve, at the equilibrium point. The divergent case occurs when the supply curve is more elastic than the demand curve, at the equilibrium point SAMUELSON THEORY OF BUSINESS CYCLE: Samuelsons theory is regarded as the first step in the direction of integrating theory of Multiplier and the principle of Acceleration. His model shows how the multiplier and acceleration interact with each other to generate income, to increase consumption and investment, demand more than expected and how this causes economic fluctuations. To understand Samuelsons model, let us first understand derived investment. Derived demand is the investment in capital equipment, which is undertaken due to increase in consumption making new investment necessary. We will try to understand this interaction briefly. When autonomous investment takes place in a society, income of the people rises and the process of Multiplier start increasing the income, which leads to the increase in demand for consumer goods depending on the marginal propensity to consume.

If there is excess production capacity, the existing stock of capital would prove inadequate to produce consumer goods to meet the
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rising demand. Producers trying to meet the growing demand undertake new investments. Thus, increase in consumption creates demand for investment.

This marks the beginning of Acceleration process, when derived investment takes place income increases further, in the same manner as it happens when the autonomous investment takes place. With increase in income, demand for consumer goods rises. This is how the Multiplier and the Accelerator interact with each other and make the income grow at a rate much faster than expected. With the help of both the Multiplier and Acceleration principle, Samuelson tried to relate the upswings and downswings of business cycle. There are some criticisms regarding the assumptions, they are as follows Though many economists had different approaches, some attribute business cycle to expansion and contraction of money supply some say it is due to the interaction of Multiplier & Acceleration which changes the aggregate demand and leads to fluctuations but some attribute it to the innovations in one sector which spreads to the rest of the economy that causes recession and boom.

There are other economists, who attribute fluctuation of business cycle to the politicians manipulating economic policies and some say supply shocks for e.g., 1970s sharp increase in oil prices,
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increased inflation. All these theories have elements of truth. But they are not valid in all the places and time. The key is to understand them and combine these theories and use the knowledge of macro economics to decide when and where to apply it. HICKS THEORY OF BUSINESS CYCLE: Hicks put forward a complete theory of business cycle bases on the interaction between the multiplier and accelerator by choosing certain values of marginal prosperity to consumers and capital output ratio which we thinks are representative of the real world situation. According to hicks the value of marginal propensity to consume and capital output ratio fall in either region. The theory of business cycles has been in a peculiarly unsettled position since Keynes' General Theory first appeared. The older students of the subject were, as a rule, concerned with the fluctuations in business activity at largenot with the movements of a particular economic factor such as production, employment, prices, or incomes. Keynes shifted the emphasis violently in two directions. First, he made the level of employment his major interest. Second, he concentrated on the factors that tend to make this level at one time higher or lower than at another. Thus the fundamental unit of analysis became the 'volume of employment at any time' rather than 'the business cycle.' This shift of emphasis was well suited to the thirties, when
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unemployment overshadowed every other economic and political problem. Before long Keynes' theory was eagerly embraced and ingeniously simplified. Not only business cycle theory but the theory of value itself fell for a time by the wayside. For if Keynes was able to explain what determines the volume of employment without troubling much about the cost-price structure, some of his followers could do so without troubling about it at all. But economic life does not stand still and ever)' change in its underlying conditions sooner or later stimulates fresh economic thinking. Under the impact of war and inflation during the forties, theoretical interest in the behaviour of prices, production, efficiency, and the business cycle has slowly remerged. Hicks' recent book on the 'trade cycle' is a significant expression of renewed concern with the cycle, in contrast to the level of employment. A fundamental task of modern economics, as Hicks sees it, is to pass from the Keynesian theory of employment to a theory of business cycles. And that is what he has set out to do. "It is . . . a mistake," he tells us, "to begin one's investigation with a definition of the kind of fluctuation which one is going to regard as basic deciding whether one is going to regard the cycle as being fundamentally a fluctuation in employment, or output, or prices, or interest rates, or money supplies. It is better to allow the definition to emerge as the theory develops". This suggests that the interdependence of the money supply, costs, prices, profits, income disbursements, consumer spending, investment,
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employment, and other economic factors will be fully displayed in unfolding the drama of the cycle. And if this suggestion carries a promise of useful achievement, so too does Hicks' awareness of the hard road that must be travelled in building knowledge. For while he believes he has found the "main part of the answer" to the puzzle of business cycles, he candidly describes his work as "little more than an untested hypothesis" which will need to be tested "against the facts" before it can be accepted as a basis for prescriptions of policy. PROFITABILITY IN BUSINESS CYCLE THEORY AND FORECASTING: According to RBC theory, business cycles are therefore "real" in that they do not represent a failure of markets to clear but rather reflect the most efficient possible operation of the economy, given the structure of the economy. RBC theory differs in this way from other theories of the business cycle such as Keynesian economics and Monetarism that see recessions as the failure of some market to clear. Given the important connections among profitability, investment, and economic activity, a profitability indicator can be used to assess where the economy is in the business cycle. Rising profitability suggests that the economy is on a secular growth path, while a peak or fall in profitability suggests that growth is slowing and the economy is headed for recession. One measure of

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profitability is to divide total business sector profit by total wages paid to labour. Let this variable be called the PW ratio.

This paper's research shows that the PW ratio leads recessions, and that it takes two to six quarters of decline in PW before the onset of recession. PW clearly peaks in stage three of the business cycle. The evidence demonstrates that the PW ratio compares favourably with other indicators used by forecasters. The paper concludes that wages are not responsible for squeezing profits until stage seven on average, and fluctuations in profit over the cycle exceed that of wages and the gap grows in late expansive.

UNDER CONSUMPTION THEORY OF BUSINESS CYCLE: Under consumption Theories (International Publishers, 1976) Michael Blamey defined two main elements of classical (preKeynesian) under consumption theory. First, the only source of recessions, stagnation, and other aggregate demand failures was inadequate consumer demand. Second, a capitalist economy tends toward a state persistent depression because of this. Thus, under consumption is not seen as part of business cycles as much as (perhaps) the general economic environment in which they occur. Compare to the Marxian tendency of the rate of profit to fall, which has a similar belief in stagnation as the natural (stable) state, but which is otherwise distinct and in critical opposition to
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under

consumption

theory.

In under

consumption theory

in economics, recessions and stagnation arise due to inadequate consumer demand relative to the amount produced. The theory has been replaced since the 1930s by Keynesian economics and the theory of aggregate demand, both of which were influenced by under consumption. Under consumption theory narrowly refers to heterodox

economists in Britain in the 19th century, particularly 1815 onwards, which advanced the theory of under consumption and rejected classical economics in the form of Ricardian economics. These economists did not form a unified school, and their theories were rejected by mainstream economics of the time. Under consumption is an old concept in economics, going back to the 1598 French mercantilist text Les Tensors et richesses pour metre l'Estat en Splendour (The Treasures and riches to put the State in Splendour), if not earlier. The concept of under consumption had been used repeatedly as part of the criticism of until under consumption theory was largely replaced by Keynesian economics which points to a more complete explanation of the failure of aggregate demand to attain potential output, i.e., the level of production corresponding to full employment.

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One of the early under consumption theories says that because workers are paid a wage less than they produce, they cannot buy back as much as they produce. KEYNESIAN THEORY OF BUSINESS CYCLES: Keynes response to classical theory of trade cycle. The Keynes theory of business fluctuations was developed during the Great Depression of the 1930 s it was in response to the classical theory that the economy is self correcting. The classical economists were of the view that if at any time excessive unemployment occurs in the economy market forces automatically restores the economy to its full employment level in the long run. J. M. Keynes, however, disagreed with the above view He presented a new theory which is based on a demand side explanation of business cycles.

According to Keynes in the short run, the level of income, output and employment is determined by the level of aggregate effective demand. Aggregate demand is composed of demand for consumption goods and demand for investment goods. If the expenditure on goods and services and investment is large, then greater quantity of goods will be produced. This will create more employment and income if the aggregate demand is low then smaller amount of goods and services will be produced. A lower level of aggregate, demand thus results in smaller output, income and employment. J.M. Keynes is of the view that it is the changes
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in the level of aggregate demand which bring about fluctuations in the level of income output and employment. Now what causes changes in aggregate demand?

The fluctuation in economic activity says Keynes is due to fluctuations in investment demand. The investment demand is determined by expected rate of profit from the investment on the one hand and the rate of interest on the other hand.

Investment demand Lord Keynes defines marginal efficiency of capital as the expected rate of profit between the prospective yield of that type of capital and the cost of producing that unit If the prospective rate of return of capital used in the business is higher than the current rate of interest the entrepreneurs are encouraged to increase investment spending on construction, equipment, and inventories. Marginal efficiency of capital depends upon two factors: (1) Expected return from capital assets and (2) The supply price or replacement cost of the assets. Marginal efficiency of capital is raised by opening of a new investment a new product a new method of production a major change in the organization of business and by the expectation of rising prices It is lowered by failing prices rising costs productive difficulties and a decline in investment. A rise in the marginal efficiency of capital relatively to the current rate of interest leads to a burst in investment. The
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volume of employment and income increases. The demand for consumer goods goes up which leads to further increase in investment goods industries. Expansion phase of the business cycle: During the expansion of trade cycle the investors have an optimistic outlook. They in enthusiasm over estimate the expected rate of return from the investment projects. The expansion of the economy goes on automatically till full employment of resources is reached. The movement of the economy towards full employment is called a boom fl the boom phase the investors ignore the fail in the marginal efficiency of capital. The rate of interest also does not act as a brake on rising investment. The over investment n the economy raises the cost of production of goods and begins to reduce profits on investment.

Recession and Depression: The contraction phase of the business cycle is brought about by a fall in the marginal efficiency of capital relatively to the prevailing rate of interest when all the remunerative channels for investment are fully utilized then the scope for further investment declines. Due to excessive demand for loadable funds, the reserves of the banks get depleted. The market rate of interest goes up. The higher rate of interest induces people to save more money. The higher liquidity preference or the increasing demand for money to hold reduces the demand for consumer goods. When the
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business prospects appear bleak the investors are then not prepared to renew or extend their capital equipment. Due to excess of savings over-investment the income and employment decline we are then in a phase of recession which finally results in depression. It may be remembered here that J M Keynes has used three psychological propensities in formulating his theory of business cycle. They are (i) propensity to consume (ii) propensity to save and (iii) the marginal efficiency of capital Lord Keynes also introduced the concept of multiplier in order to show the effect of increase in total income due to increase in investment. Keynes is of the view that upswing of business cycle is caused by a rise in the marginal efficiency of capital. When the entrepreneurs find that the opportunities for profitable investment exist they repair the existing plants and install the new ones. The money spent by the investors goes into the pockets of wage earners. They then increase their orders of consumption goods. The total receipts of the entrepreneurs go up. They being encouraged to high profits place more orders for consumption and capital goods industries. The volume of employment and income increases. The multiplier is then at work. Recovery is a slow process According to Keynes the recovery after depression is a slow process. How much time the economy takes to recovery depends upon three factors:
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i) Rate of growth of the economy. Ii) Time period of the wearing out of the capital goods. Iii) Time taken to dispose of the stocks of the boom period. Keynes theory dominated economic thinking from late 1930s to early 1970S. Criticism of Keynes Theory of Trade Cycle. The Keynesian theory of business cycle is criticized on the following grounds: (i) it offers half explanation Keynes theory offer half explanation of the business cycle. It fails to explain the periodicity of the trade cycles. (ii) Neglect of the role of accelerator J M Keynes explained the process of downswing and upswing of trade cycle through the concept of investment multiplier. The fact however is that multiplier alone does not offer satisfactory explanation of the business fluctuations. It is the multiplier acceleration interaction which brings about expansion or contraction of the economic activity. (iii) Psychological theory Keynes theory of trade cycle is very near to the psychological theory of the Classical economists. It does not explain the real factors which cause changes in business expectations.

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BUSINESS AND GROWTH RATE CYCLE : Business and growth rate cycles with special reference to the Indian economy. It uses the classical NBER approach to determine the timing of recessions and expansions in the Indian economy, as well as the chronology of growth rate cycles, viz., the timing of speedups and slowdowns in economic growth. The reference chronology for business as well as growth rate cycles is determined on the basis of the consensus of key coincident indicators of the Indian economy, along with a composite coincident index comprised of those indicators, which tracks fluctuations in current economic activity. Finally, it describes the performance of the leading index a composite index of leading economic indicators, designed to anticipate business cycle and growth rate cycle upturns and downturns

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Conclusion.
Most economists explain business cycles in terms of the sticky price model we have been discussing. That is, there is a short run aggregate supply curve so that when aggregate demand fluctuates, there is a fluctuation in total output. The model doesnt work perfectly, and economists would like an alternative. In recent years, many economists have begun to suggest an alternative model, that business cycles are due to fluctuations in the aggregate supply curve.

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BIBLIOGRAPHY: References: H.L. Ahuja for macro economics Steven M. Sheffrin (2003) - Economics: Principles in action. www.wikipedia.com www.investopedia.com www.businesscycle.com

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