Business Cycle - Explained
What is the Business Cycle?
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Table of ContentsWhat is the Business Cycle?Phases of the Business Cycle?What is the Modigliani Miller theorem?Academic Research on Business Cycle
What is the Business Cycle?
From a conceptual observation, the business cycle is defined as the economy-wide fluctuations in trade and the general economic activity. The cycle is upward as well as the downward movement of various levels from gross domestic products.
More simply, the business cycle signifies variations in the production of goods and services in a nation. These business cycles are usually determined as per the increase and decrease in real gross domestic product or adjustments made in GDP for inflation. Business cycle and market cycle are different in nature. The business cycle is determined using indices of the stock market. Debt cycle, which is a term different from the business cycle, is the increase and decrease in privately and publicly held debt. The business cycle is also referred to as the economic cycle, or trade cycle.
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Phases of the Business Cycle?
It also refers to the period of expansion coupled with contractions in different economic activities and businesses around a long-term trend of growth. Besides, business cycles are characterized by a great boom in one sector and a period of collapse in the next in different economic activities. These fluctuations are known as phases. They are of four types:
Expansion: Theexpansion stage is also referred to as prosperity. It includes a steady growth and development throughout the business cycle. In the phase of expansion, there will be some increase noticed that will be coupled with different economic factors including production, output, wages, demand as well as the supply of products.
Peak: The peak phase entails the gradual slow down of the economic cycle which is also accompanied by the increase in growth rate of the business cycle until it reaches a limit. In this phase, some of the economic elements such as profit, sales, employment as well as production are relatively higher, but they don't increase further than that specified level.
Recession: The peak phase entails a slow stage of a gradual decrease in demand because of the increase in prices of various inputs. When the decline in need of multiple products becomes rapid, the recession phase takes place. In the recession phase, the economic factors including product prices and saving as well as investment begins to decrease. Producers aren't aware of the decrease in demand for products. This phase is also characterized by the trough stage in which the economic activities of a country decline instantly thereby hitting below average. The interest rates will decrease. So will there be a rapid decline in the general national income.
Recovery Phase: In the trough phase, the economy of a country reaches its lowest level of shrinking. This is the limit to which the economy of a country shrinks. Once it touches the lowest level, it becomes the end of negativism and then the beginning of positivism. The reversal of the business cycle then occurs.
What is the Modigliani Miller theorem?
Born in Rome, Italy, Franco Modigliani, was the son of Enrico Modigliani and Olga Flaschel. His father was a revered pediatrician in their city while his mother served as a volunteer in social work. His early school performance was outstanding. In 1932, he lost his father in an operation table. The event took aback as his life was grievously affected. He then moved to the best school in Rome and managed to challenge himself into registering excellent performance. When he turned 17, he joined the University of Rome. Franco Modigliani became an economist as well as an educator. His works were so outstanding to the point of receiving the Nobel Prize for Economics based on his works on household savings as well as the dynamics. He was also awarded for spearheading research in different fields such as economics and creating the theory of the life cycle in marketing which proposes that people develop a store of wealth in their youthful years while working not to pass their savings to their heirs but to indulge in consumption at old age. As such, he came up with the Modigliani Miller theorem which reiterates the basis of modern thinking based on capital structure. The fundamental theorem also states that in the absence of various state taxes, agency costs, or asymmetric information, or efficient market, the value of a corporation is unaffected by how the company is financed. The theorem was created in a universe that had no taxes. But, if people were to move to a world with taxes, when the interest debt is tax-deductible, the value of the company would increase instead.