Business cycle

Money and work change in cycles.

Sometimes things grow and get better. This is called expansion. Other times, things slow down. This is called a recession.

These cycles can happen many times. They often last a few years. Some cycles last about two to ten years.

Many things can cause these changes. A big change in oil prices can do it. People spending less money can also do it.

Some cycles are very long. One type can last for many years. We use math to help us study them.

It is interesting to watch how the world changes.

Money and work in the world change in cycles. These cycles move between growth and slow times. Growth is called expansion. When things slow down, it is called a recession.

Most cycles last between two and ten years. Some are much longer. For example, a cycle called the Kondratiev wave can last 45 to 60 years.

Many things cause these shifts. A big change in oil prices can cause a cycle. If people spend less money, it can also cause a change. Sometimes, unexpected events like the COVID-19 pandemic cause a sudden shift.

People have studied these cycles for a long time. In 1819, Jean Charles Léonard de Sismondi wrote about economic crises. He thought cycles happened because of too much making and too little buying. Later, Joseph Schumpeter said cycles have four stages. These stages are expansion, crisis, recession, and recovery.

In the United States, a group called the National Bureau of Economic Research studies these cycles. They look at many things like jobs and income to see if a recession is happening.

Business cycles are patterns of change in how a country makes and uses money. These cycles move between times of growth and times of slowing down. When the economy grows, it is called an expansion. During an expansion, production and prices often go up. When the economy slows down, it is called a recession. These changes affect everyone, including families, companies, and governments.

Economists look at many different signs to track these cycles. One simple way is to watch the GDP, which measures total economic activity. A recession can be defined as two quarters of negative growth. In the United States, the National Bureau of Economic Research uses a more detailed way. They look for a big decline in many areas at once. This includes real income, jobs, and how much businesses sell.

People have studied these patterns for a very long time. In 1819, Jean Charles Léonard de Sismondi wrote about economic crises. He believed cycles happened because of overproduction and underconsumption. This means people made too many things but did not buy them. Later, in 1860, Clément Juglar identified cycles that lasted 7 to 11 years. Joseph Schumpeter also described four stages: expansion, crisis, recession, and recovery.

Different cycles happen over different amounts of time. Some are short, like the Kitchin cycle which lasts 3 to 5 years. Others are much longer, like the Kondratiev wave. That long wave can last between 45 and 60 years. These cycles are often caused by sudden, unexpected events. Changes in oil prices or how much people want to spend can cause shifts. Even big events like the 2008 financial crisis or the COVID-19 pandemic can change the pattern.

Understanding these cycles helps us see how the world changes. Since the Industrial Revolution, new technology has helped the economy grow a lot. For example, the value of an hour of work grew from $3 in 1900 to $22 in 1990. Governments also try to use special rules to keep the cycles from getting too bad. They use fiscal and monetary policies to help keep things steady. This helps prevent the deepest and hardest parts of a recession.

A business cycle refers to the periodic intervals of economic expansion and recession. These cycles represent fluctuations in general economic activity over time. They are not the same as long-term economic trends. Long-term trends are driven by slowly changing factors like technological advances. Instead, business cycles are medium-term evolutions in the economy. These shifts have major implications for private firms and government institutions. They also impact the welfare of the general population.

Economists use several methods to define and identify these cycles. A simple definition describes a recession as two consecutive quarters of negative Gross Domestic Product (GDP) growth. However, more satisfactory classifications use multiple economic indicators. In the United States, the National Bureau of Economic Research (NBER) oversees a Business Cycle Dating Committee. This committee defines a recession as a significant decline in economic activity. This decline must be spread across the market and last more than a few months. The NBER looks at real GDP, real income, employment, and industrial production. It also monitors wholesale and retail sales to confirm a recession.

Business cycles often move through specific stages. The economist Joseph Schumpeter identified four distinct stages in a model based on the Juglar cycle. The first stage is expansion, which involves increases in production and prices alongside low interest rates. The second stage is a crisis, where stock exchanges crash and many firms face bankruptcy. The third stage is a recession, characterized by falling prices, lower output, and high interest rates. Finally, the recovery stage occurs as stocks recover due to falling prices and incomes.

History shows that many thinkers have attempted to explain these movements. Before 1819, classical economists often denied that business cycles existed. They frequently blamed economic shifts on external factors like war. Jean Charles Léonard de Sismondi changed this in 1819 with his work on overproduction and underconsumption. He argued that wealth inequality caused these cycles. Later, in 1860, Clément Juglar identified cycles lasting between 7 and 11 years. Karl Marx also studied these periodic crises in capitalism. He believed these crises were increasing in severity over time.

Different types of cycles are classified by their periodicity, or how long they last. The Kitchin inventory cycle lasts about 3 to 5 years. The Juglar fixed-investment cycle lasts between 7 and 11 years. There is also the Kuznets infrastructural investment cycle, often called the building cycle, which lasts 15 to 25 years. The longest is the Kondratiev wave, or long technological cycle, which spans 45 to 60 years. These cycles can be triggered by unpredictable "random shocks." Examples include sudden changes in oil prices or the COVID-19 pandemic.

Modern economics also uses statistical modeling to understand these patterns. Econometricians use time series analysis to separate regular patterns from "noise." Noise refers to unusual, short-term changes like a single worker strike or severe weather. Some researchers use a Bayesian statistical framework to study these cycles. This allows them to include flexible knowledge about how often cycles occur. Many modern studies suggest that business cycles behave in a stochastic way. This means they follow a pattern that includes random variables rather than a strictly fixed, deterministic path.

Technological progress has played a massive role in the economy since the Industrial Revolution. This progress often has a larger effect than fluctuations in debt or credit. For example, the purchasing power of an hour's work grew from $3 in 1900 to $22 in 1990. This is measured in 2010 dollars. Since 1960, World GDP has increased by fifty-nine times. However, these increases have not kept pace with annual inflation. To manage these changes, governments use fiscal and monetary policies. These tools aim to provide economic stabilization and mitigate the worst parts of the cycle.