The term business cycle or economic cycle refers to the fluctuations of economic activity (business fluctuations) around 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. Despite being termed cycles, these fluctuations in economic growth and decline do not follow a purely mechanical or predictable periodic pattern.
Types of business cycle:
A number of types of business cycles, in the traditional sense of a fluctuation within a regular period have been proposed. The main types of business cycles enumerated by Joseph Schumpeter, and others in this field, have been named after their discoverers or proposers:
1. the Kitchin inventory cycle (3–5 years) — after Joseph Kitchin,
2. the Juglar fixed investment cycle (7–11 years) — after Clement Juglar,
3. the Kuznets infrastructural investment cycle (15–25 years) — after Simon Kuznets, Nobel Laureate,
4. the Kondratieff wave or cycle (45–60 years) — after Nikolai Kondratieff.
5. the Forrester cycles (200 years) - after Jay Wright Forrester.
6. the Toffler civilisation cycles (1000-2000 years) - after Alvin Toffler.
Even longer cycles are occasionally proposed, often as multiples of the Kondratieff cycle. Interest in traditional business cycles was strongest before World War II. However, interest has waned since the development of modern macroeconomics, which generally gives little support to the idea of regular periodic cycles.
In 1860, French economist Clement Juglar identified the presence of 8 to 11 year cycles. In Business Cycles, Schumpeter suggested this cycle be named after Juglar. These cycles are made up of four stages, each linked to the variation in prices, production and interest rates:
1. expansion = increase in production and prices , and low interests rates.
2. crisis = stock exchanges crash and bankruptcies of several companies occur.
3. recession = decrease in price and in output, high interests rates.
4. recovery= stocks recover thanks to the fall in prices and incomes.
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 built on a bubble of confidence that bursts or deflates. 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. Cycles between 1945 and the 1990s in the United States were generally more restrained and followed political factors, such as fiscal policy and monetary policy. Automatic stabilisation due to the government's budget helped defeat the cycle even without conscious action by policy-makers.
A colloquial term for a crisis of this time scale is a "decennial crisis" (meaning one that occurs after about ten years). This phrase was used during the Great Depression due its similarity with the Panic of 1825 in London ten years after the end of the Napoleonic Wars. After the Second World War, however, the nearest equivalent in time and intensity was the recession of 1958.