| Market economies regularly experience periods of | | | | infecting one another with optimistic or pessimistic |
| expansion and periods of contraction. This rises | | | | expectations. If people are worried about the |
| and falls are the business cycle. The business | | | | possibility of losing their jobs in the near future |
| cycle or trade cycle is ? permanent feature of | | | | they tend to save more. ? country's output, |
| market economies: gross domestic product (GDP) | | | | investment, unemployment, balance of payments, |
| fluctuates as booms and recessions succeed each | | | | and so on, all depend on millions of decisions by |
| other. | | | | consumers and industrialists on whether to spend, |
| During ? boom, an economy (or at least parts of | | | | borrow or save. |
| it) expands to the point where it is working at full | | | | Investment is closely linked to consumption, and |
| capacity, so that production, employment, prices, | | | | only takes place when demand and output are |
| profits, investment and interest rates all tend to | | | | growing. Consequently, as soon as demand stops |
| rise. | | | | growing at the same rate, even at ? very high |
| During ? recession, the demand for goods and | | | | level, investment will drop, probably leading to ? |
| services declines and the economy begins to | | | | downturn. |
| work at below its potential. Investment, output, | | | | When people infect one another with pessimistic |
| employment, profits, commodity and share prices, | | | | expectations, they think that the economy will go |
| and interest rates generally fall. ? serious, | | | | into recession, therefore they invest and consume |
| long-lasting recession is called ? depression or ? | | | | less and in this way they can bring about a |
| slump. | | | | recession. If people reduce their investment and |
| The highest point on the business cycle is called ? | | | | consumption still further, the recession will continue |
| peak, which is followed by ? downturn or | | | | and will get worse. This situation can be called a |
| downswing or ? period of contraction. The lowest | | | | self-fulfilling downturn. In order to change a |
| point on the business cycle is called ? trough, | | | | situation, governments should change people’s |
| which is followed by ? recovery or an upturn or | | | | expectations. Governments should make people |
| upswing or ? period of expansion. Economists | | | | think that the economy would expand and in this |
| sometimes describe contraction as 'negative | | | | way change people’s expectations from |
| growth'. | | | | self-fulfilling downturn self-fulfilling upturn. |
| There are various theories as to the cause of the | | | | Another theory is that sooner or later during |
| business cycle. The traditional theory of the | | | | every period of economic growth - when demand |
| business cycle is that it's caused by upturns and | | | | is strong, and prices can easily be put up, and |
| downturns in the behavior of companies, in terms | | | | profits are increasing - employees will begin to |
| of mostly their investments and of their stocks, | | | | demand higher wages or salaries. As ? result, |
| and on particular the fact when demand pressure | | | | employers will either reduce investment, or start |
| is very strong, that companies run at very high | | | | to lay off workers, and ? downswing will begin. |
| levels of capacity, they’re using their plants to | | | | External (or exogenous) theories, on the contrary, |
| the full, and then they tend to invest perhaps | | | | look for causes outside economic activity: |
| overmuch, and if demand weakens a little, people | | | | scientific advances, natural disasters, elections or |
| stop investment completely, that feeds right back | | | | political shocks, demographic changes, and so on. |
| into the stock cycle, and pushes the economy | | | | Joseph Schumpeter believed that the business |
| down from a high level to a low level, and it may | | | | cycle is caused by major technological inventions |
| stay at the low level until companies have to | | | | (the steam engine, railways, automobiles, |
| invest to replace investment, rather than investing | | | | electricity, microchips, and so on), which lead to |
| to increase capacity. | | | | periods of ‘creative destruction'. ?? suggested |
| The standard classical theory of the economy | | | | that there was ? 56-year Kondratieff cycle, |
| suggests that economies naturally return to an | | | | named after ? Russian economist. ? simpler |
| equilibrium level, where they make full use and | | | | theory is that, where there is no independent |
| efficient use of ?ll their resources. But there are a | | | | central bank, the business cycle is caused by |
| number of very strong assumptions to make that | | | | governments beginning their periods of office with |
| model work. There has to be perfect competition, | | | | ? couple of years of austerity programs followed |
| there has to be ? lack of exogenous shocks from | | | | by tax cuts and monetary expansion in the two |
| the world outside, there has to be perfect | | | | years before the next election. |
| information, so everybody knows exactly | | | | The example of exogenous factors may be an |
| what’s going on in the market at any one | | | | event which happened not so long time ago: the |
| time, and the responses have to be very quick. | | | | reunification of Germany in 1991. The shock of |
| We know that people make a lot of mistakes in | | | | German reunification rised interest rates and |
| terms of information, they see the future | | | | demand fell away sharply, because capacity was |
| incorrectly, and they’re often surprised by | | | | so strong, investment also fell away strongly, so |
| developments in the external environment which | | | | there were two or three years of strongly |
| they haven’t seen. | | | | negative grows, that was not a result of bad |
| Industrialists have to adjust their prices very | | | | policy or any economical troubles, but was just |
| quickly, wage-setters have to adjust their prices | | | | concerned with political event and it took three or |
| very quickly. | | | | four years to recover from that overinvestment |
| Internal (or endogenous) theories consider | | | | cycle. |
| business cycle to be self-generating, regular, and | | | | All the theories show that falls and rises in |
| indefinitely repeating. When economic times are | | | | economic life usually happen due to the |
| good or when people feel good about the future, | | | | expectations of people, who suppose some |
| they spend, and run up debts. ? peak is reached | | | | changes and react either optimistically or |
| when (or just before) people begin to consume | | | | pessimistically. All the factors may change |
| less, for whatever reason. If interest rates rise | | | | people’s expectations and it’s hard to |
| too high, ? lot of people find themselves paying | | | | predict how employees or employers, consumers |
| more than they anticipated on their mortgage or | | | | or producers will behave in different situations. |
| rent, and so have to consume less. As far back | | | | That is why it’s hard to manage an economy |
| as the mid-nineteenth century, it was suggested | | | | on the state scale. |
| that the business cycle results from people | | | | |