The economic cycle called the time interval between two identical states of the economy. There are four phases of the cycle: peak (highest point of economic activity), recession (recession), lowest point of activity (depression), rise (expansion).
First phase - peak cycle. It is matched by high employment, full utilization of production capacities, and the highest level of business activity. The price level, wage rate and interest rates are very high.
Second phase - recession (crisis). It corresponds to surplus capital, which does not find its use in new investments, which leads to a fall in the rate of interest on loans. Production and employment are reduced, as a result, supply exceeds demand, inflation and other negative phenomena in the economy arise.
Third phase - the lowest point of recession (depression). Here, production and employment are at their lowest. Enterprises are trying to get out of stagnation, adapt to low prices by reducing production costs. There is a renewal of fixed capital, the demand for it is growing, which is an incentive for the development of industries that produce means of production, and then for the revitalization of the entire economy.
Fourth phase - climb. Here investment activity is increasing, new contracts are being concluded, the demand for loan capital is growing, the level of interest on loans, production and employment is increasing. Prices are rising, unemployment is falling to full employment and capacity utilization. This state of the economy continues until it reaches the highest indicators, that is, up to peak. Then the phases of the cycle are repeated again.
Features of the modern economic cycle:
- thanks to the regulatory activities of the state, economic cycles have become less deep and less long. The duration of the cycle decreased from 10–12 years at the end of the 19th century. up to 5-7 years old;
- earlier, the phases of the cycle in different countries occurred at different times. The cycle is now synchronized, and its phases begin in most countries almost simultaneously;
- due to countercyclical regulation, the boundaries between the individual phases of the cycle have become more blurred, and the phases of the cycle smoothly transition into one another;
- from the beginning of the 70s of the twentieth century. the economic cycle is characterized by stagflation - a simultaneous rise in inflation and unemployment;
22. Inflation, its causes and forms. Price indices
Under inflation usually understand the excess of money in circulation, which leads to their depreciation and an increase in prices for goods and services. Inflation, although it manifests itself in a rise in prices, cannot be reduced only to the monetary factor. This is a complex socio-economic phenomenon generated by the imbalances in reproduction in various areas of the market economy. Inflation manifests itself in the depreciation of money in relation to gold, commodities, foreign currencies.
Some features of modern inflation:
- earlier inflation covered the economy of one or several countries, but now the rise in prices is not local, but global in nature;
- modern inflation is not episodic, but continuous, chronic. Currently, prices rise in all phases of the economic cycle, without decreasing in any way even during periods of economic growth;
- inflation in different countries develops at different rates, unevenly, abruptly, which is influenced by internal factors, as well as the degree of government intervention in the economy;
- the nature of inflation has changed: at present, not creeping, but galloping inflation prevails.
Inflation reasons diverse. There are internal and external causes of inflation. Internal reasons due to the state of the economy of a given country. The most common ones are:
– an increase in government spending that does not lead to an increase in production ( military expenditures, maintenance of the state apparatus);
– state budget deficit. If it is covered by loans from the country's central bank, the amount of money in circulation rises sharply, leading to inflation;
– the presence of imperfect competition in the market. A monopoly or an oligopoly first creates an artificial shortage of goods in the market, and then stimulates a reduction in the production of goods through higher prices;
– spending on social goals inadequate to the capabilities of the nationallinen economy;
– a high degree of monopolization of the economy. Monopolies are not interested in lowering prices and have leverage to maintain them at a high level;
– inflation expectations... When inflation starts, the population plans their behavior in anticipation of further price increases and begins to purchase goods for future use, assuming that their prices will rise even more.
– credit expansion- expansion of the scale of lending in excess of the needs of the economy, which causes the emission of non-cash money;
– excessive investment in certain sectors of the economy, for example, in agriculture, which do not give the desired economic effect;
– structural violations in the economy - disproportions between accumulation and consumption, demand and supply, income and expenditures of the state.
TO external reasons relate:
– internationalization of economic ties. The presence of inflation in other countries through the prices of imported goods affects the dynamics of domestic commodity prices.
– depreciation of the national currency against walutam of other countries. As a result, domestic prices for imported goods are growing, and the exchange of foreign currency for national currency requires additional emission of money;
– negative balance of payments and trade balances, growth of externalhis public debt encourage the government to spend foreign exchange reserves to cover them, which contributes to inflation;
– world economic crises, leading to a significant decline in the production of exported products and an increase in prices for natural fuel and energy resources, and as a result to an increase in prices for finished products;
– currencyforeign trade policy of the country.
Measuring inflation. Inflation is measured by retail price index . Usually, for this purpose, a "consumer basket" is used, in which all goods and services purchased by an average citizen of the country for a certain period are "added up" and their prices are summed up. In order to determine the change in prices for a month, quarter, year or other period, it is necessary to calculate prices at the end and beginning of this period. The difference between them is inflationary rise in prices. The inflation rate is calculated using the formula:
price index = value of the market basket in a given period / value of a similar market basket in the base period * 100%
Inflation rate are determined as follows: the price index of the previous (base) period is subtracted from the price index of the current period, and the difference is divided by the price index of the previous (base) period.
There is a more simplified way of measuring inflation rates, which is called "Rule of magnitude 70". To determine the number of years over which the average price level will double, it is necessary to divide the number 70 by the annual inflation rate.
There are two main types of inflation: demand inflation and supply inflation. Demand inflation arises as a result of an increase in demand in conditions of full utilization of production capacities, which means that it is impossible to respond to this by increasing production.
Cost inflation (supply) arises from rising prices due to increased production costs.
Also distinguish tax inflation and price cap inflation... Tax inflation occurs when the government imposes excessive taxes and producers are forced to significantly raise prices. A similar rise in prices occurs when producers raise prices in advance in order to compensate for future losses that cannot be determined in advance.
By inflation growth rate emit moderate (creeping) inflation - the rise in prices is less than 10% per year, galloping - price increase from 10 to 200% per year, hyperinflation- the price increase is more than 200% per year, superinflation - prices are increasing by more than 50% per month.
By the degree of balance, there are balanced inflation, at which the prices for most goods and services grow in approximately the same way and at the same time, and unbalanced inflation, in which prices rise at different rates for different products.
On the basis of predictability, one can distinguish expected inflation, which is expected and forecasted by the government and the population, and unexpected inflation, which is characterized by a sudden jump in prices.
By the scale of coverage, there are local inflation, taking place in individual countries, and world inflation, covering groups of countries.
By the nature of the flow, there are open inflation, characterized by a clear prolonged rise in prices, and suppressed inflation, arising from firm "frozen" retail prices for goods and services and a simultaneous increase in monetary incomes of the population. Suppressed inflation is the result of universal state control over prices, total administration in the field of pricing.
The industrial (business) cycle is of particular importance in a market economy. Its manifestations in market conditions are especially prominent. It is to him, first of all, that numerous studies of scientists-economists are devoted.
It should be noted that industrial cycles that took place before the beginning of the 20th century, in an era of free competition, and modern cycles in a regulated market economy, differ significantly both in duration and in manifestations of imbalance, the depth and scale of the decline in production and living standards of the population. ... In the XIX century. the crises were characterized by significant synchronicity, almost simultaneously affecting all industrialized countries. Their duration ranged from one to two years and were characterized by a drop in production volumes by 5-10%. Overproduction crises occurred when the balance between aggregate demand and aggregate supply was disturbed. The cyclical development of the economy acted as a mechanism for self-regulation of the market. When the market was oversaturated, there was a decline in production, which continued until the accumulated inventories were depleted. This was followed by a rise in production until the next crisis. An important consequence of the overproduction crises was the renewal of fixed capital.
The industrial cycle included the following phases: crisis (recession), depression, recovery, recovery. The complete view of the economic cycle is shown in the figure.
Business cycle model
The crisis- This is a period of a sharp decline in production, i.e., a decrease in output. The crisis begins with a decline in business activity amid falling prices. It indicates an overaccumulation of capital. There is an overproduction of commodity capital, which is manifested in the growth of stocks of unsold products; overaccumulation of productive capital, as evidenced by an increase in the underutilization of production capacities, an increase in unemployment; overaccumulation of money capital, that is, an increase in the amount of money not invested in production.
The overall result of the overaccumulation of capital is a fall in prices and profits, a decrease in production volumes, the ruin of enterprises, an increase in unemployment, and a decrease in the income of the population. Due to the death of capital in the form of unsold goods, firms lack funds for current payments, so the loan payment - the interest rate on loans - begins to grow rapidly. At the same time, stock prices are falling.
The economic crisis reveals not only the limit, but also the impetus for the development of the economy. He forcibly restores disturbed proportions, performs a stimulating "cleansing" function. During a crisis, in conditions of lowered prices, there are incentives to increase profits by reducing production costs, renewing capital on a new technical basis.
Depression is characterized by some stabilization. The decline in industrial production and prices stops. Wages and unemployment stabilize at a certain level. In conditions of low business activity, the demand for money is low, as a result of which the lending rate falls. In the period of depression, stocks of unsold products are gradually eliminated, conditions are created for a new upswing.
The revival is characterized by improved economic performance. In an effort to increase profits in an environment of low prices, entrepreneurs are beginning to replace major equipment. Production is gradually expanding, employment is growing, unemployment is decreasing, prices are increasing, wages and interest rates are increasing. The demand for consumer goods is growing. The revival turns into a recovery phase.
During the period of recovery, there is an active growth of all macroeconomic indicators. Rising prices are offset by increases in wages and profits. The entire volume of manufactured products is absorbed by growing demand, and employment is increasing. After a while, the economy reaches its highest point, which is called a boom. A boom is characterized by the expansion of production, the involvement of additional resources, an increase in costs and, accordingly, prices. At the same time, capital overaccumulation is gradually emerging again, and the disproportions between supply and demand are growing. A crisis ensues and the economic cycle begins again.
The modern business cycle differs from the classical one in shorter duration and smooth cyclical fluctuations. This is due, on the one hand, to the accelerated renewal of fixed capital, which reduced the duration of the cycles to five to six years. On the other hand, the state is pursuing an active countercyclical policy, which allows to significantly smooth out fluctuations in macroeconomic indicators during the cycle. Instead of a crisis phase, there may be recession- a slight decline in business activity from the peak to the lowest point of production decline - or even a decrease in growth rates without a decrease in absolute production volumes.
The reasons for cyclicality in economics is one of the most difficult problems of economic theory. For the reasons of economic cycles, various scientists attribute such exogenous (external) factors as the impact of natural conditions, political instability, psychological factors: the ratio of optimism and pessimism in the economic activity of entrepreneurs.
Endogenous (internal) factors were most productively studied by K. Marx and J.M.
Does not apply to the phases of the economic cycle
Keynes. Underconsumption was identified as the main factor in the emergence of crises. The cause of underconsumption, according to Marx, is the exploitation of labor by capital, and from the point of view of Keynes, the lack of aggregate demand, due to the propensity of people to save.
Another important factor in the cyclical nature of the economy is scientific and technological progress.
Domestic scientist N.D. Kondratyev (1892–1938) developed the concept of "large cycles of the market", or "long waves". According to her, in the economy, along with medium and short cycles, there are long-term long-wave fluctuations, covering a time period from 45 to 60 years. Kondratyev came to this conclusion on the basis of an analysis of statistical data (dynamics of prices, wages, foreign trade turnover, extraction of minerals and metals and other indicators) of the economic development of England, France and the United States over 150 years. As a result of his research, he identified the following long-wave cycles:
| Climb | Recession |
|---|---|
| 1789-1814 | 1814-1849 |
| 1849-1873 | 1873-1896 |
| 1896-1920 |
The scientist considered large cycles as a disturbance and restoration of economic equilibrium for a long period. They are characterized by the following patterns:
- an upward wave is accompanied by great changes in economic life (there is a change in money circulation, new scientific and technical discoveries appear);
- the upward wave is accompanied by significant social upheavals (wars and revolutions);
- periods of an upward wave of each major cycle are accompanied by a prolonged and sharply identified depression in agricultural production;
- in the period of the upward wave of large cycles, the middle cycles are characterized by the shortness of depressions and intense rises, and in the period of the downward wave, the opposite phenomena occur.
Kondratyev's conclusions were confirmed in the development of the economic conjuncture during the XX century. The Great Depression unfolded during the downward wave of the Great Cycle that began in the late 19th century. Fifty years later, in 1973–1975, against the background of a downward wave, the deepest world crisis erupted, accompanied by a devastating decline in production. Economic growth in developed countries in the 80s and 90s. determined the beginning of a new upward wave of the big cycle. Scientists who studied the long-wave cycle after Kondratyev (J. Schumpeter, S. Kuznets, W. Mitchell, J. Yakovets) confirmed that the transitions from one phase of the big cycle to another are associated with technological upheavals and structural transformations in the economy.
To maintain economic stability in society, the state pursues a policy of smoothing economic cycles, mitigating cyclical fluctuations. The most important instruments by which the state influences the economic cycle are monetary and fiscal levers. During the crisis and the subsequent recession, the state takes measures aimed at stimulating production, and during the recovery - to contain it. Therefore, in the recovery phase, the cost of credit rises, new taxes are introduced, the rates of existing taxes are raised, accelerated depreciation and tax incentives for new investments are canceled. In a crisis, on the contrary, government measures are aimed at making loans cheaper, tax cuts, accelerated amortization and tax rebates on new investments. Thus, the spontaneous market mechanism of the economy's functioning in the form of cyclical crises is intertwined with a conscious state influence on the reproduction process.
Inflation has become an integral part of the current economic crisis. It interacts with the cyclical movement of the economy and changes the mechanism of the cycle. This change is characterized by a decrease in the “sensitivity” of prices to the crisis contraction of market demand and an increase in this sensitivity to an increase in demand. In other words, the mechanism of modern cycles combines crisis and inflation. In this regard, the countercyclical orientation of the state policy was replaced by an anti-inflationary one.
Business cycle phases
In modern economic literature, there are two approaches to the study of economic cycles. In the first, the economic cycle is divided into two phases: recession and recovery. Recession means crisis and depression, recovery means recovery and boom.
recession phase, or recession, which lasts from peak to bottom. A particularly long and deep recession is called depression;
a phase of recovery, or recovery, which continues from bottom to peak.
Rice. 1.3 two-phase model: 1 - decay (compression) phase; 2 - phase of rise (expansion)
There is another approach, in which four phases are distinguished in the economic cycle: crisis (recession, recession), depression (stagnation), recovery and recovery (boom, peak).
Business cycle phases
Rice. 1.4 four-phase model: 1 - crisis phase; 2 - depression phase; 3 - revival phase; 4 - lifting phase.
The main property of the cycle is fluctuations in the rate of GDP growth over time, when the economic system goes through four consecutive phases. In the classical cycle, the initial and defining phase is the crisis. It is the most important prerequisite for the progressive development of the economy through the renewal of fixed capital, lower production costs, and improved quality and competitiveness of products.
Crisis phase. The main manifestation of the crisis is a drop in production and a reduction in the size of GNP. Accordingly, enterprises are not fully loaded, profits decrease, stock prices fall, employment decreases, wages fall, the living standard of the population falls, and poverty increases. As a result, aggregate demand decreases, in response to this, production and, accordingly, supply are further reduced. In general, this phase is characterized by an excess of the aggregate supply of aggregate demand. An imbalance also exists in the money market. The money supply lags behind the commodity supply, there is a shortage of money, especially at the initial stages of the crisis. Therefore, the only thing that can grow during a crisis is the rate of bank interest, since the demand for money exceeds their supply. A high rate of interest with low profitability, and often unprofitable enterprises, leads to low investment activity. In time, the crisis can last from several months to several years, as it was during the Great Crisis of 1929-1933.
Depression phase. This phase is characterized by the suspension of the decline in production; decrease in stocks of goods in warehouses; low business activity; an increase in the mass of free money capital. The level of production at this stage of the cycle remains stable, but in comparison with the pre-crisis level remains very low - there is no growth; the fall in prices is suspended; unemployment continues to be high. The depression phase can be very long. It can last from several months to several years. For example, which began in 1933. after the Great Crisis, the depression lasted until 1938, practically until the war itself.
Revitalization phase. It is characterized by a revival of the economy, there is some growth in GDP, and the demand for labor, for loan capital, and for new industrial equipment is increasing. Unemployment is reduced; prices begin to rise; demand is increasing on the product market. Most importantly, the investment activity of enterprises is stepping up. Usually this phase does not last long, it quickly moves into the next phase.
Rise phase. This phase is also called a boom, as it is characterized by fairly rapid economic growth. At this phase, the production output exceeds the pre-crisis level. The new technology serves as the material basis for the renewal of production, as a result, it reaches a new, higher level of development. There is an increase in employment, in some sectors there is a shortage of labor. Wages, aggregate demand, sales, profits and stock prices of enterprises are rising. The interest rate no longer rises, and sometimes even declines. In a word, during the recovery, everything speaks of economic well-being and even prosperity.
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ECONOMIC CYCLE PHASE
Science »Economics
11/10/2011 Aleksandr Minkov
THE PHASE OF THE ECONOMIC CYCLE, a periodically repeating part of the economic cycle (business cycle), which consists of four successive phases: crisis, depression, recovery and recovery.
Economic cycle, phases and types
In the Western economic literature, these phases are called differently: a crisis is called a depression, a depression is called a recession, an upswing is called a boom. The cycle is therefore composed of the following phases: depression, recession, recovery and boom.
Each phase plays in deployment. cycle its role, preparing the conditions and prerequisites for its transition to the next phase. In different economic cycles, their individual phases differ in duration and depth. The main phases of the cycle are the crisis and recovery, the intermediate phases are depression and recovery.
The initial and defining phase of the cycle is the economic crisis, which is characterized by a drop in the volume of production, prices, profits, and wages to the minimum level. As a result of the reduction in the aggregate demand for goods and services, the volumes of unsold products and the underutilization of production capacities are growing. The reduction in the number of jobs leads to a deterioration in the situation on the labor market and an increase in unemployment in all its forms. Interest rates on loans are falling, prices of securities are falling. Aggravating socio-economic contradictions, the phase of the crisis creates at the same time the prerequisites for entering a new stage of economic growth. The physical and moral deterioration of equipment is accelerating, the way is cleared for updating the production apparatus on the basis of new equipment and technology, for various kinds of innovations.
The phase of depression (recession) is characterized by slow or zero growth rates inherent in a stagnant state of the economy. The minimum of economic activity is left behind. During the recovery phase, economic growth picks up, output, investment and employment pick up, approaching the highs of the previous cycle. A new maximum in the movement of production, investment, employment, prices and profits, interest rates and securities prices is reached in the upswing phase.
In modern conditions, under the influence of the state countercyclical policy, the strengthening of the social orientation of the economies of developed countries, the globalization of the world economy, the economic cycle is smoothing. It is expressed in a change in the ratio of the various phases of the cycle, the relative duration and depth of each phase. First of all, this refers to the phase of the crisis, the duration and depth of which are decreasing. The crisis phase is softening, and its place is increasingly being replaced by a recession phase.
S.A. Khavina.
The economic cycle and its phases
The dominant place in the theories of economic cycles is occupied by the problems of manifestation of medium-term economic cycles. They are more studied than other types of cycles.
Economic crises recur regularly at regular intervals. The first economic crisis occurred in 1825. At first, crises repeated themselves with a frequency of 10-11 years, and then the period separating one crisis from another was reduced and now is 5-7 years.
The period of movement of production from the beginning of one economic crisis (or any other phase) to the beginning of another (another phase) is usually called the economic cycle.
As mentioned in the second paragraph of this chapter, different sources use different names for medium-term cycles: “industrial cycle,” “business cycle,” “capitalist cycle,” and so on. These are just different names for the same phenomenon, which is associated with periodic downturns and ups in the economy over a period of time.
In the 19th century and the first half of the 20th century, crises predominantly affected industrial production. But now they affect the entire economy as a whole. Therefore, it is quite legitimate to use the concept of "economic cycle" in modern scientific and educational literature, as it is more consistent with the content of this phenomenon.
In the economic literature, the sequence, content and name of the phases of the economic cycle are interpreted in different ways. Let us dwell on two main options: 1) the Marxist interpretation of this problem; 2) the interpretation of the phases of the cycle in American literature.
According to the Marxist interpretation, the economic cycle consists of the following phases: crisis, depression, revival, recovery (Fig. 17.2).
The crisis in Marxist literature is the main phase of the economic cycle. A crisis is a sharp disruption of the existing equilibrium as a result of growing imbalances. In this phase, there is a decrease in demand and an excess of supply.
Question 6. The phases of the economic cycle does NOT include:
Marketing difficulties lead to a decrease in production and an increase in unemployment. The decline in the purchasing power of the population further complicates marketing. All economic indicators are declining. There is a drop in the levels of wages, profits, investments, prices. Due to the death of capital in the form of unsold goods, enterprises lack funds for current payments, so the loan payment - the interest rate on loans - is growing rapidly. Securities prices are falling, a wave of bankruptcies and mass closings of enterprises sets in.
Figure 17.2. Business cycle phases
The depreciation of goods, unemployment, the direct destruction of part of fixed capital - all this means a huge destruction of the productive forces of society. Through the bankruptcy of a large number of enterprises and the destruction of part of the productive forces, the crisis forcibly adjusts the size of production to the level of effective demand and restores for some time the disturbed proportions of reproduction.
The crisis ends with the onset of depression.
The depression phase is characterized by the fact that production no longer decreases, but does not grow either, that is, it is in a state of stagnation. Outdated equipment is gradually being eliminated, stocks of goods are decreasing either by their destruction or their sale at low prices. Prices, wages, unemployment stabilize at a certain level. The production of new products begins. At the same time, the mass of money capital, finding no use for itself, flows to banks, which increases the supply of free money. But the demand for them is insignificant, and the lending rate falls to a minimum.
In general, the depression phase contributes to the mobilization of resources for the subsequent economic recovery. The renewal of fixed capital begins, which contributes to the transition from depression to recovery, and then to an increase in production.
Revival and recovery as phases of the economic cycle are characterized by the following features: rapid growth of production; an increase in demand for goods and a significant increase in commodity prices; an increase in the demand for labor, a decrease in unemployment and an increase in wages; the growth of profits of entrepreneurs, the growth of demand for loan capital and an increase in the interest rate on loans.
The recovery phase is characterized, in contrast to the recovery phase, by slow growth after some stabilization. This phase, as a rule, is not pronounced, but here all economic indicators reflecting the state of the economy receive a positive growth trend. In the recovery phase, enterprises, having recovered from the crisis shocks, bring the volume of production to the pre-crisis level.
During the recovery phase, production exceeds the high point reached in the previous cycle on the eve of the crisis. This leads to the expansion of trade beyond the effective demand of the population. Preconditions are being created for the next economic crisis of overproduction.
Each phase of the economic cycle creates within itself the conditions and prerequisites for the transition to the next phase. The process of overcoming the crisis and the transition to depression, recovery, and then rise, is the result of the action of numerous factors, of which the following are the main ones:
1) falling commodity prices. The fall in prices caused by the crisis leads to the fact that goods that did not find themselves before sales, begin to gradually be sold;
2) reduction in the size of production. During a crisis, production drops sharply, which leads to a decrease in the supply of goods on the market. As a result, the size of supply, in the end, adapts to the size of effective demand. And the overproduction is gradually absorbed;
3) destruction of part of the goods. Some goods, stuck in warehouses during the crisis, are subject to spoilage. To eliminate part of the commodity surplus, during the crisis of 1929-1933. the mass of goods was simply destroyed (cotton, coffee, pork);
4) impairment of elements of fixed and working capital. During a crisis, prices for means of production fall more than for consumer goods, which leads to an increase in the rate of profit. This encourages entrepreneurs to invest in new capital. Therefore, the decline in production is gradually replaced by its expansion;
5) falling wages. Lower wages during the crisis mean lower production costs for entrepreneurs. The rate of profit is growing, which gives entrepreneurs new incentives to expand production.
Already during the crisis and depression, fixed capital is being renewed. Falling prices and heightened competition during the crisis are forcing entrepreneurs to look for ways to reduce production costs. But in order to reduce costs, they must replace old machines and equipment with new, more productive ones. When the renewal of fixed capital acquires massive proportions, the transition from revival to growth takes place.
The replacement of old machinery and equipment with new ones, the construction of new enterprises entail an increase in demand for means of production and lead to a more rapid growth of the industries that produce them. The growth of industries producing means of production, in turn, leads to an increase in the number of workers employed in them and an increase in demand for consumer goods. This causes an increase in the production of goods in industries that produce consumer goods. Thus, the massive renewal of fixed capital serves as the material basis for the recovery phase.
However, the renewal of fixed assets does not continue indefinitely. After several years of recovery, the re-equipment of old enterprises and the construction of new ones ends, as a result of which the additional demand for means of production, which was caused by the renewal of fixed capital, decreases. New enterprises are being commissioned, which are throwing significant masses of goods onto the market. But the abrupt growth of marketable output does not correspond to the growth of effective demand. And after the upsurge comes the crisis again.
Currently, most economists believe that the periodic renewal of fixed capital is the material basis for the periodic repetition of cyclical processes.
The American literature uses a different terminology for the phases of the economic cycle. For example, the authors of "Economics" K. McConnell and S. Brue believe that economic cycles have the following phases: peak, decline, lowest point of decline, recovery (Figure 17.3).
Figure 17.3. Economic cycle according to K. McConnell and S. Bru
In the peak phase, the economy is full-time and manufacturing is operating at full or near-full capacity. The price level tends to rise, and the growth of business activity stops.
During the recession phase, production and employment decline, but prices do not yield to the downward trend. Prices fall only when the decline is severe and prolonged.
The lowest point of recession, or depression, is characterized by the fact that production and employment, having reached their lowest level, again begin to “get out” from the bottom.
During the recovery phase, the level of production rises and employment rises, up to full employment.
There are other interpretations of average economic cycles. All of them reflect the real situation in the economy and, with a different approach, reveal the unity in the recognition of cyclical development.
Features of the modern economic cycle. In the second half of the 20th century, economic cycles and crises acquired new features and characteristics. The basis for the changes was the modern scientific and technological revolution, the process of further socialization of production and capital, the development of international integration, and the strengthening of state regulation of the economy.
The following features of modern economic cycles and crises can be distinguished:
1. Crises began to occur more often, the duration of the cycle decreased from 11-12 years at the end of the 19th - the first half of the 20th century. up to 5-7 years old at the present time.
2. Modern economic crises are characterized by a smaller decline in production. For example, in the pre-war period, the decline in production in the United States was: in 1920-1921. - 33%, in 1929-1933. - 53%, in 1937-1938. - 33%. In the post-war years, during the economic crises, the decline in production ranged from 8 to 14%.
3. The mechanism of the cycle itself has also changed. Previously, the main way out of the crisis was falling prices, depreciation of fixed assets, and a decline in wages. Now the main way out of the crisis has become a reduction in production while maintaining monopoly high prices. At the same time, nominal wages can even increase, restraining the fall in their real level.
4. Previously, the renewal of fixed capital took place in leaps and bounds in the phases of recovery and recovery. Now, in the conditions of scientific and technological progress and the aggravation of the competitive struggle, the renewal of fixed capital occurs more or less evenly in all phases of the economic cycle.
5. Now the course of economic growth, in addition to cyclical crises, is disrupted by structural crises, currency crises, inflationary processes, etc.
6. If before the phases of the cycle did not occur in most developed countries at the same time and the cycle was asynchronous, now the phase of the crisis occurs in most countries at the same time.
7. The state began to implement an active anti-crisis policy, influencing the course of the entire cycle. This led to the fact that the boundaries between the phases became indistinct, blurred. Whole phases began to drop out of the cycle, for example, after a crisis, bypassing the depression phase, revival may immediately begin.
Economic crises lead to severe socio-economic consequences: loss of material resources, increased unemployment, bankruptcy of small and medium-sized enterprises, deterioration of the material situation of the majority of the population. All this creates a tense social situation in society. Therefore, the state influences the economy through its countercyclical policy. The essence of countercyclical politics is to manage booms and bumps. The main task of countercyclical regulation is crisis prevention. For this, monetary and fiscal mechanisms are used.
The higher the rates of economic development, the more its “overheating” at the stage of recovery, the stronger the impending crisis will be. Therefore, in order to prevent "overheating", the state at a certain point begins to impede high growth rates. Raising the refinancing rate and provisions makes money more expensive and reduces the flow of investments. Cuts in government spending reduce aggregate demand and reduce business activity. This is also served by increased taxes, the abolition of tax breaks on investments and accelerated depreciation. In some cases, to avoid a deep crisis, the government can provoke it ahead of time. Such an artificially induced crisis may be less deep and lasting.
In times of crisis and depression, in order to stimulate production, the state increases its spending, cuts taxes and provides enterprises with tax incentives for investments and accelerated depreciation, takes measures to reduce the cost of loans and reduce reserves. In some cases, the state resorts to a policy of protectionism, stimulating domestic producers and protecting the domestic market from foreign competitors through customs duties and restrictions on imports of goods. Changes in exchange rates also play a stimulating role, increasing the efficiency of exports and limiting imports.
It should be noted that government regulation should combine the achievement of opposite goals: on the one hand, preventing a decline in production and an increase in unemployment, and, on the other, preventing the development of inflation.
The condition for the sustainability and stability of the country's economic development is, i.e. balance between production and consumption, aggregate demand and aggregate supply. However, in a market economy, the state of equilibrium is periodically violated. A certain cyclicality is observed, i.e. repeatability, in the functioning of the national economy when periods of economic recovery are replaced by periods of recession and depression, and then there is an upturn and boom again. Cyclicity can also be defined as a movement from one macroeconomic equilibrium to another, from one economic cycle (business cycle) to another.
Economic theory distinguishes a number of cycles of economic development (growth): long-wave cycles, expressing long-term fluctuations in economic activity with a period of about 50 years and called "Kondratyev cycles" (named after the Russian economist Nikolai Dmitrievich Kondratyev (1892-1938); normal, or so-called large, industrial cycles with a period of 8 to 12 years ("Zhuglar cycles"), named after the French economist K. Zhuglar (1819-1908) for his study of industrial fluctuations in France, Great Britain and the USA: small cycles, or "Kitchin cycles" (named after the American economist who discovered them - J. Kitchin (1861 - 1932), lasting 3-4 years and covering the period required for the massive renewal of fixed assets.
Cycle phases
In the classic version, the economic cycle is of four phases: recession, depression, rise and boom. The final and initial phase in the development of the cycle is the overproduction of products in comparison with demand. In turn, overproduction occurs due to excessive investment (this leads to an overaccumulation of capital) compared to.
Capital overaccumulation leads to excess capacity, an increase in inventories, a slowdown in capital turnover and, as a result, a drop in the incomes of entrepreneurs and their workers. In turn, this leads to a decrease in the aggregate demand for investments and consumer goods and services, and, ultimately, to a drop in the GDP / personal income growth rate and even its reduction with all the ensuing consequences - a fall in stock prices, an increase in unemployment, etc. Coming decay phase.
IN depression phase the decline in production stops, but remains high, a decrease in the rate of lending interest stimulates the demand for capital, this creates the preconditions for capital accumulation. There comes a new phase in the movement of the cycle - climb, at the entrance of which investments grow, unemployment decreases, demand grows, there is an increase in the rate of return and interest rates. The rise of the economy often develops into boom, when production volume exceeds the pre-crisis level... Everyone is involved, unemployment is reaching a minimum. accompanied by a general rise in wages and prices. As a result, actual GDP exceeds potential GDP. Coming inflation gap... Business growth stops. Outside of the boom, there is a sales problem, production declines, and GDP growth rates sharply decline (Figure 23.2).
Rice. 23.2. Business cycle model
The terminology for the phases of the cycle may vary. For example, a recession is often called a recession, a recovery is a recovery, and a boom is a prosperity.
Evolution of business cycles
Industrial cycles were clearly visible already at the beginning of the 19th century. In 1825, the first economic crisis broke out in England, then the economic leader. Subsequently, economic crises recurred periodically in 8-12 years, gradually taking on a global character.
In the first half of the XX century. the longest and deepest was the world crisis of 1929-1933. The fall in GDP reached more than 40% in some countries.
The post-war economic cycles were greatly influenced by the scientific and technological revolution and the state countercyclical regulation of the economy, and then by the “new economy”. As a result, the nature of the cycles changes, including the depth of crises and the duration of the main phases, the interval between which has been reduced from 8 to 4 years. Moreover, the most destructive was the crisis of the mid-70s.
In the 90s. in developed countries, undulating fluctuations in the production process were observed without a deep decline in production, the severity of crisis manifestations decreased, and the factors that counteract the decline in production increased. This was especially evident in the dynamics of GDP and industrial production.
Since the late 90s. XX century. In the development of the economies of the United States, Japan and the European Union, periods of recession, stagnation and low growth rates alternated with periods of recovery. So, in 1999 and 2000. the average annual GDP growth in the United States was 4.1%, and in 2001 it increased by only 1.2%. In 2002, GDP growth rates in the United States accelerated noticeably, but a weakening of economic activity was observed in these years in most developed and developing countries. 2003 was marked by a global economic downturn. According to UN forecasts, in the coming years, the growth in the world economy will be uneven and at a slower pace.
) and economic recovery (economic revival). The cycles are periodic, but usually irregular. Within the framework of Keynesian-neoclassical synthesis, cycles are usually interpreted as fluctuations around the long-term trend of economic development.
Climb
Climb(recovery) occurs after reaching the lowest point of the cycle (bottom). It is characterized by a gradual growth in employment and production. Many economists believe that this stage is characterized by low inflation rates. Innovation is being introduced in the economy with a short payback period. Demand pent-up during the previous downturn is being realized.
Peak
Peak, or the top of the business cycle, is the “high point” of economic recovery. In this phase, unemployment usually reaches its lowest level or disappears altogether, production capacities operate at maximum or close to it load, that is, almost all the material and labor resources available in the country are involved in production. Usually, though not always, inflation rises during peaks. The gradual saturation of markets intensifies competition, which lowers the rate of return and increases the average payback period. The need for long-term lending is increasing with a gradual decrease in the ability to repay loans.
Recession
Impact on the economy
The existence of the economy, as a collection of resources for a steadily growing consumption, has an oscillatory character. Fluctuations in the economy are expressed in the economic cycle. The “thin” moment of the economic cycle is considered to be a recession, which, at some scales, can turn into a crisis.
The concentration (monopolization) of capital leads to “wrong” decisions on the scale of the country's economy or even the world. Any investor seeks to receive income from their capital. The investor's expectation of the size of this income comes from the boom-peak stage, when the income is maximum. At the stage of recession, an investor considers it unprofitable for himself to invest in projects with a yield lower than yesterday's.
Without such investments (investments), production activity is reduced, as a result of the solvency of workers in this area, who are consumers of goods and services in other areas. Thus, a crisis in one or several industries affects the entire economy as a whole.
Another problem of capital concentration is the withdrawal of money supply (money) from the sphere of consumption and production of consumer goods (also the sphere of production of the means of production of these goods). The money received in the form of dividends (or profits) is accumulated in the accounts of investors. There is a shortage of money to maintain the required level of production, and as a consequence, a decrease in the volume of this production. The unemployment rate is growing, the population is saving on consumption, and demand is falling.
Of the economic sectors, the service sector and non-durable goods industries are somewhat less affected by the devastating effects of the economic downturn. The recession even contributes to the revitalization of some activities, in particular, increases the demand for the services of pawnshops and lawyers specializing in bankruptcy. Firms that produce capital goods and consumer durables are most sensitive to cyclical fluctuations.
Not only are these firms the hardest to weather the downturn, but they are the ones who benefit the most from the rebound. There are two main reasons: the possibility of postponing purchases and market monopolization. The purchase of capital equipment can often be postponed for the future; in difficult times for the economy, manufacturers tend to refrain from purchasing new machinery and equipment and constructing new buildings. During prolonged recessions, firms often choose to repair or modernize outdated equipment rather than spending large sums on new equipment. As a result, investment in manufacturing goods is sharply reduced during economic downturns. The same applies to consumer durables. Unlike food and clothing, buying a luxury car or expensive home appliances can be put off until better times. During economic downturns, people are more likely to fix rather than change durable goods. While sales of food and apparel tend to decline as well, the decline is usually less than the decline in demand for durable goods.
Monopoly power in most capital goods and consumer durables stems from the fact that the markets for these goods are typically dominated by a few large firms. Their monopoly position allows them to keep prices at the same level during economic downturns, reducing production in response to falling demand. Consequently, falling demand affects production and employment much more than prices. A different situation is typical for industries producing short-term consumer goods. These industries usually respond to falling demand with a general decline in prices, since none of the firms has significant monopoly power.
History and long cycles
Business cycles are not truly “cyclical” in the sense that the length of a period, say, from one peak to another has fluctuated significantly throughout history. Although economic cycles in the United States lasted about five years on average, cycles are known to last from one to twelve years. The most pronounced peaks (measured as a percentage increase over the trend of economic growth) coincided with the great wars of the 20th century, and the deepest economic recession, excluding the Great Depression, was observed after the end of the First World War. It should be noted that along with the described economic cycle, the so-called. long cycles. Indeed, at the end of the 20th century. the American economy appears to be in a long recession, as evidenced by some economic indicators such as real wages and net investment. Nevertheless, even with a long-term downward trend in growth, the US economy continues to grow; Although in the early 1980s, the country recorded a negative GDP growth, in all subsequent years, except for 1991, it remained positive. Symptomatic of the long-term recession that began in the 1960s is the fact that, although growth rates have rarely been negative, the level of economic activity in the United States has hardly exceeded the growth trend since 1979.
Economic Cycle Models
Dynamic model of aggregate supply and demand
In fact, the economy does not develop along a straight line (trend) that determines economic growth, but with a constant deviation from the trend, with ups and downs, i.e. cyclically (Fig. 1). Business or economic cycles (business cycle) - periodic ups and downs in the economy, as well as fluctuations in business activity. These fluctuations are unpredictable and irregular, therefore the term "cycle" is used here rather conditionally.
The cycle has two extreme points:
- The peak point, which corresponds to the maximum of business activity.
- The bottom point (trough), corresponding to the minimum of business activity, i.e. maximum decline.
Typically, business cycles are divided into two phases. The first phase is called the recession phase and it lasts from peak to bottom. With a prolonged and deep recession, depression occurs. The second phase is called the recovery or recovery phase, and it continues from bottom to peak.
In addition, there is another approach that divides economic cycles into four phases. However, extreme points are not distinguished here, since it is believed that when the economy reaches the maximum or minimum of business activity, it is in this state for a sufficiently long period of time. So:
- Phase I - boom, characterized by maximum activity in the economy. This is a period of over-employment and inflation. In this state, the economy is called "overheated" ("overheated economy").
- Phase II - recession or slump, characterized by a gradual return of the economy to the trend level, a decrease in the level of business activity, the actual GDP approaching its potential level and a fall below the trend, which transfers the economy into the third phase.
- Phase III - crisis or stagnation. There is a referential gap in the state of the economy, in which the actual GDP is lower than the potential. This period is characterized by the underutilization of economic resources, i.e. high unemployment.
- Phase IV - revival or recovery, in which the economy begins to gradually recover from the crisis, and the actual GDP grows to the potential level, after which it surpasses it, striving to reach a maximum, which returns the situation to the first phase.
The reasons for the business cycle
In economic theory, it is noted that economic cycles arise due to a variety of phenomena: the level of solar activity, revolutions, military coups, presidential elections, high population growth, insufficient consumption, investor sentiment, price shocks, technical and technological innovations, and much more. In fact, all the reasons ever listed can be combined into one - the mismatch between aggregate demand and supply, as well as aggregate costs and production. In this regard, the cyclical development of the economy can be explained in several aspects. First, this is a change in aggregate demand with a stable value of aggregate supply. Secondly, this is a change in aggregate supply with a stable value of aggregate demand.
Let's say business cycles arise due to changes in aggregate demand or consumption. Let's consider an example of how these indicators will behave at each phase of the cycle (Fig. 2. (a)).
The boom phase is characterized by the onset of a moment at which it will not be possible to sell the entire produced volume of production, i.e. total costs will be lower than output. As a result, there is overstocking, which leads to an increase in inventories at enterprises. This, in turn, leads to the curtailment of production, which becomes the reason for the layoff of workers and an increase in the level of unemployment. As a result, total income, and therefore total expense, decreases. First of all, such economic cycles are manifested in a decrease in demand for durable goods and a drop in enterprise demand for investment, which leads to a decrease in the short-term interest rate. As a rule, in such conditions, the long-term rate rises due to the sale of bonds in conditions of reduced income and a lack of cash. A decrease in total income reduces tax revenues to the state budget, which leads to an increase in the size of state transfer payments and a state budget deficit. Enterprises try to sell their products by lowering prices, which leads to deflation.
Soon, businesses are faced with a situation where products are not sold even at lower prices. In this case, the company can resort to several solutions. Firstly, this is the acquisition of more efficient equipment, which will allow the continued production of goods at lower costs. Thus, the company will be able to reduce the price of products without thereby reducing the amount of profit. Secondly, an enterprise can engage in the production of a new type of goods, which requires technical re-equipment. In both cases, it is possible to achieve an increase in demand for investment goods, which will allow expanding production in industries that produce investment goods. As a result, there is a revival in this area, which leads to an increase in employment, an increase in enterprise profits, and an increase in total income. As incomes rise, so does the demand in industries that produce consumer goods, and the production of these goods expands. These processes are gradually covering the entire economy. Thus, economic cycles move into a recovery phase.
With the growing demand for durable goods and investments, a rise in the cost of credit occurs, i.e. the short-term interest rate is growing. At the same time, a decrease in the long-term interest rate is observed, as the demand for bonds grows and prices for securities rise. The price level is growing. Tax revenues are increasing. Transfer payments are reduced. The state budget deficit is decreasing, which makes it possible for a surplus to appear. With the rise of the economy and the growth of business activity, economic cycles move into a phase of "overheating" of the economy, which leads to another recession.
So, business cycles are based on changes in investment spending, since investment is the most volatile part of total expenditure (aggregate demand).
Figure 2 shows business cycles graphically using the AD-AS model. Figure 2 (a) depicts a business cycle with a change in aggregate demand (total spending), and Figure 2 (b) shows an economic cycle with a change in aggregate supply (total output).
It is worth noting that in conditions when the reason for the recession in the economy is a decrease in aggregate supply, basically all indicators behave in the same way as in the case of a decrease in aggregate demand (aggregate consumption). The exception is the indicator of the general price level, which grows with the deepening of the recession. This situation is called "stagnation" and is characterized by a simultaneous decline in production and an increase in the price level. As a rule, such a recession is emerged through investments that increase the capital stock in the economy and allow the aggregate supply to grow.
Business cycle indicators
The rate of growth (g) is the main indicator of the phases of the cycle. Its calculation is carried out according to the following formula:
g = [(Yt - Yt1) / Yt1] x 100%, where
Yt is the real GDP of the current year,
Yt1 is the real GDP of the previous year.
Thus, economic cycles by this indicator are characterized as the percentage change in real GDP in each subsequent year in comparison with the previous one. If this value is positive, then economic cycles are in an upward phase, otherwise, in a downward phase. This indicator is calculated once a year, and the value is used to characterize the rate of economic development.
In addition, economic cycles at different phases are characterized by different indicators that depend on the behavior of economic values. Among them are:
- Procyclical indicators that rise in the boom phase and fall in the recession phase (sales, total revenues, real GDP, firm profits, imports, transfer payments, tax revenues).
- Countercyclical indicators that increase in the recession phase and fall in the recovery phase (the size of the stocks of firms, the unemployment rate).
- Acyclic indicators, the value of which is not related to the phases of the cycle, since they are not cyclical (export volume, depreciation rate, tax rate).
Types of economic cycles
Economic cycles are classified according to their duration:
- hundred-year cycles, whose duration is one hundred years or more;
- “Kondratiev's cycles”, which last 50-70 years. They got their name from the outstanding Russian economist N.D. Kondratyev, who developed the theory of "long waves of economic conditions";
- classical cycles lasting 10-12 years and characterized by massive renewal of fixed capital;
- Kitchin cycles, whose duration is 2-3 years.
Thus, economic cycles differ into different types based on the duration of the functioning of a particular physical capital in the economy. For example, centenary cycles are determined by the emergence of scientific discoveries and inventions that make a real revolution in production technology. Long-wave Kondratieff cycles are based on the service life of industrial and other structures and buildings, i.e. on the passive part of physical capital. "Classic" cycles are characterized by a duration of 10-12 years, during which there is a physical deterioration of the equipment, ie. the active part of physical capital. It is worth noting that modern conditions put in the first place when replacing equipment, not physical, but obsolescence. In other words, over time, more productive and perfect equipment appears, as a result of which it becomes necessary to replace outdated equipment. As a rule, new technical and technological solutions are developed every 4-6 years, but this cycle is gradually decreasing. Also, many economists note that economic cycles in terms of duration depend on the massive consumer renewal of durable goods, which occur at intervals of 2-3 years.
In modern economics, it is noted that economic cycles at the present time in terms of the duration of the phases and the amplitude of fluctuations can be very diverse. First of all, it depends on the causes of the crisis and the characteristics of the economy of a particular country (the degree of government intervention, the share and level of development of the service sector, the nature of the regulation of the economy, the conditions for the development and application of the scientific and technological revolution).
It is very important to distinguish between cyclical and non-cyclical fluctuations. In this regard, economic cycles are characterized by changes in all indicators and coverage of the entire industry or sector. In turn, non-cyclical fluctuations are accompanied by changes in business activity only in certain industries, which are seasonal in nature, and only some economic indicators change.
