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Economic cycles are regularly repetitive periods in the development of a market economy. The overall trend of economic growth is accompanied by periodic fluctuations in economic activity: alternation of contraction and expansion of production, investment, decrease and increase in income levels, employment, prices, interest rates, rates of securities. The cycle of economic activity consists of four phases: Expansion, Peak, Recession and Bottom.
After reaching the lowest point of the cycle there is a phase of recovery, which is characterized by the growth of employment and production. Many economists believe that this stage has low inflation until the economy begins to operate at full capacity or, in other words, until it reaches a peak.
A peak, or top of business cycle, is the highest point of economic recovery. At this point, unemployment reaches the lowest level or disappeared entirely and the economy operates with maximum (or close to it) load, that is all of the country's capital and labor resources are engaged in the production. Usually, though not always, during the peak inflationary pressures increase.
A recession is a period of reducing output and business activity. As a result of contracting market, decline is usually characterized by growing unemployment. Most economists believe that economic downturn or recession is only a drop in business activity, which lasts six months at least.
Bottom of economic cycle is the lowest point of production and employment. It is believed that the achievement of the bottom predicts the end of the recession as this phase of the cycle is not long. But history knows and exceptions to this rule. The Great Depression of 1930s lasted for nearly ten years.
Long cycles are economic cycles with duration of more than 10 years. Sometimes they are called by names of their researchers.
- Investment cycles (7-11 years) are studied by Clement Juglar;
- Infrastructure investment cycles (15-25 years) are studied by Simon Kuznets;
- Series of Kondratieff (45-60 years) are described by Russian economist Nikolai Kondratiev;
- Cycles of Forrester (200 years) are described by American engineer Jay Forrester.
Cycles of economic activity are varied and differ in their duration, duration of individual phases, maximum's heights and minimum's depths. In the current conditions, smoothing of cyclical fluctuations and business activity are noticed and intervals between crises become longer, their depth and destructive power reduce. Most often, a crisis is superseded by milder form -recession.
Although it is considered that changes in business activities are directly or indirectly related to economic cycles, there are other factors affecting the economy. The most important of these are seasonal fluctuations and long-term trends. The influence of seasonal variations is observed at certain times of the year, for example, shortly before Christmas or Easter when business activity increases dramatically, especially in the retail trade. In other industries such as agriculture, car industry and construction there are also seasonal variations. Secular trends determine long-term increase or decrease in economic growth.
The economic cycle is often associated with changes in output volume. Many economists believe that output is usually measured by gross domestic product (GDP) and the most reliable indicator of the economy. It is important to note that an economic cycle in the phase of recovery is evident not in an increase in GDP, but paces of this increase. Negative values of growth rate over a certain period of time, usually six months or more, are considered as a sign of slowdown in the economy. In contrast, the consistently high, from month to month, growth rates show that the economy is booming.
Cycles of economic activity are related to small economic cycles of 10 years. They are developed against a background of a large cycle of economic development of up to 50-60 years. Large cycles are identified by Russian economist Kondratyev. They consist of upward and downward fluctuations in economic conditions, each of which lasts for up to 30 years. Large cycles are based on revolutionary changes in technologies, design and production needs. The transition to post-industrial society in the developed countries coincides with the fifth longest wave of the Kondratyev cycle. The beginning of the upward phase is associated with the restructuring of the economy based on high-profile and science-intensive technologies.