Economic Fluctuations

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Cyclical Fluctuations

Businesses that are running in a capitalist economy are likely to have ups and downs in their financial and production-related activities. If we see these fluctuations in a graph, we can witness that these fluctuations are making a wave in the graph. This wave in the graph is termed as the business cycle or trade cycle or economic fluctuations. A general trade cycle or business cycle has four stages which are classified as prosperity, recession, depression and recovery. These four stages that are present in the business cycle are termed as economic fluctuations in economical terms.

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Prosperity

For a business to survive the one thing that is required is profit, without profit it is impossible for a business to run its operations. Thus profit is considered as the oxygen of the business or in other terms the prosperity of the business. In a capitalist economy like India, a businessman gets his/her incentives or benefits only if the business he/she has invested in generates some profit. In a capitalist economy, only an increase in the profit of the business can guarantee a businessman to get some incentives.

When the businessman receives these incentives they get motivated to invest more and more in the business, thus, aiming to increase the production of the business to new higher levels. This results in expansion of the company's operations giving a boost to the employment opportunities in the country. This is because a company has to expand its workforce along with the expansion of its operations so as to be efficient and effective. 

More employment means a generation of more income among the masses which gives a rise to the demand for some products. Thus, we can witness from here that everything is interrelated in this type of economy. This is how a business performs during the prosperity stage of economic fluctuations.


Recession

With the expansion of companies, the cost of managing different operations also increases thus giving rise to diseconomy. Diseconomy is the result of the large scale production of different business houses. Large scale production gives rise to higher wages, rising cost and shortage of various resources. This is the second stage of economic fluctuations.

This stage is considered to be the recession stage in the cyclical fluctuations. The interest rate of loans provided by banks increases at an alarming rate during this stage because of the rise in demand of the bank loans. This increase in interest rates affects the profits of the business. The resultant profit at this stage is lower than the prosperity stage.


Depression

This is the third stage in cyclical fluctuations and during this stage, businesses suffer a lot. The income generation and production of output decrease at an alarming rate at this stage. This decline leads to an increased rate of unemployment in the country. Investments during depression are very low, thus, discouraging the business houses to continue with their operation. Many businesses get shut down at this stage due to low revenue and investments. This situation leads to the pessimism that in turn give rise to deflation.


Recovery

Depression stage doesn't continue forever. It tends to level down after a certain period of time. During this time, new developments and improvements in trade are witnessed. At this time, businesses clear out their debts, liquidate the units that are weak and cant be used. At this stage, businesses aim to reorganize their operations. Thus this stage is known as the recovery stage. With the development in business, the unemployment rate of the country also decreases gradually. Also during this time, business houses again start generating income from trading.


Control of Business Cycle

Government of many countries try to take many steps in order to control the business cycle so that the businesses will suffer less. The central bank plays a major role in controlling the business cycle by introducing contractionary or expansionary credit policies. A government should cut the taxes and try to spend more in order to control the business cycle.

The main objective of the government should be to increase the effective demand for some products and services by increasing the buying power of the people with new policies. The government should take more taxes during prosperity time and try to spend less. All these cyclical fluctuations are due to the capitalist economy. We can avoid the cyclical fluctuations if we shift our economy from capitalist to socialist. By shifting these, the business houses will no longer have the main objective of earning more and more profit but despite they will be more interested in giving back to society through their different operations.

FAQ (Frequently Asked Questions)

1. Difference between economic growth and economic fluctuations

Economic growth is a term which is used when there is a rise in the production of goods and services of a country. In simple words, this means that an increase in the Gross Domestic Product (GDP) of a country can lead to economic growth. This is calculated by comparing the present year’s GDP with the past year’s. In contrast, economic fluctuations are considered to be the fluctuations that can be seen in the national income of a country which is responsible for the growth and contraction of a country’s economy. This fluctuation occurs only in countries with a capitalist economy.

2. What causes fluctuations in the economy of a country?

Fluctuations in the economy can be seen in countries which have a capitalist form of economy. The economy generally fluctuates between the expansion and contractions levels. The fluctuations are due to the change in the rate of unemployment, change in productivity, the change in demand of some products and services and the change in the supply of some nation's goods and services. These fluctuations lead to four stages which are prosperity, recession, depression and recovery. The government of every country try to control these fluctuations because it can turn out to be very harmful to some business houses thus forcing them to shut down their operations.