Business Cycle: Meaning and Various Phases of Business Cycle

Business cycle is an important feature of capitalist economy. It means alternating periods of prosperity and depression in the country. It has been defined as an alternative expansion and contraction in overall business activity as evidenced by fluctuations in measures of aggregate economic activity, such as, the gross product, the index of industrial production and employment and income.

Generally speaking, the cyclical fluctuations have a tendency towards simultaneous appearance in all the branches of national economy. But, sometimes, they may be confined only to an individual industry of individual sectors of the economy. Cyclical fluctuations in such cases are referred to as specific cycles.

Phases of a Typical Business Cycle

A typical business cycle is characterized by five different phases or stages - depression, recovery (or revival), prosperity (or full employment), boom (or overfull employment) and recession.

i) Depression

The depression is the first stage of trade cycle. It is a protracted period in which business activity in a country is far below the normal. It is characterized by a sharp reduction of production, mass unemployment, falling prices, falling profits, low wages, contraction of credit, a rate of business failures and an atmosphere of all-round pessimism and despair. A decline in output or production is accompanied by a reduction in the volume of employment. A construction activity comes to a more or less complete standstill during a depression. The consumer goods industries, such as food and clothing, are not so much affected by unemployment as the basic capital goods industries. The prices of manufactured goods fall to low levels. Since the costs are ‘sticky’, and do not fall as rapidly as prices, the manufacturing suffer huge losses. Many of the firms have to close down an account of accumulated losses. The two longest depressions in the US history were those of 1873-1879 (65 months) and 1929-1933 (44 months).

ii) Recovery

It implies increase in business activities after the lowest point of the depression has been reached. During this phase, there is a slight improvement in economic activity, to start with. The entrepreneurs begin to feel that the economic situation is, after all, not so bad as it is in the preceding stage. This leads to further improvement in business activity. The industrial production picks up slowly and gradually. The volume of employment also increases steadily. There is slow but sure rise in prices accompanied by a small rise in profits. The wages also rise, though they do not rise in the same proportion in which the prices rise. Attracted by rising profits, new investments take place in capital goods industries. The banks expand credit. The business inventories also start rising slowly. The recovery continues until business activity reaches approximately the same level that it had achieved before the decline set in. the rate of recovery is generally related directly to that of the preceding depression. The more severe the depression, the more rapid will the recovery be.

iii) Prosperity

This stage is characterized by increased production, high capital investment in basic industries, expansion of bank credit, high prices, high profits, high rate of formation of new business enterprises and full employment. There is a general feeling of optimism among businessmen and industrialists. The longest sustained period of prosperity occurred in the USA between 1923 and 1929 with some minor interruptions in 1924.

iv) Boom

It is the stage of rapid expansion in business activity to new heights, resulting in high stocks and commodity prices, high profits and overall employment. The prosperity phase of the trade cycle does not end up with a stable state of full employment; it leads to the emergence of boom. The continuance of investment even after the stage of full employment results in a sharp inflationary rise of prices. This causes undue optimism among businessmen and industrialists who make additional investment in the various branches of the economy. This put additional pressures on the factors of production which are already fully employed, causing a sharp rise in their prices. Soon, the situation develops in which the number of jobs exceeds the over full employment. Attracted by rising profits, the businessmen further increase their capital investments. Runaway inflation raises its head in all its ugliness. Prices rise sky-high. There is an atmosphere of over-optimism all round.

But the developing boom carries within it the seeds of self-destruction. Factors of production become scarce causing spurt in their prices. The costs of calculations are upset. Some new hastily set up firms collapse. This makes the businessmen over-cautious. They now begin to stay away from new projects and even stop the expansion of existing units. This prepares the ground for the succeeding stage. A boom is inevitably followed by a bust.

v) Recession

A feeling of over-optimism of the earlier period is replaced now by over-pessimism characterized by fear and hesitation on the part of the businessmen. The failure of some among businessmen. The banks also get panicky and begin to withdraw loans from business enterprises. More business enterprises fail. Prices collapse and confidence is rudely shaken. The initial unemployment spreads to other industries. Unemployment leads to a fall in income, expenditure, prices and profits. Once a recession starts, it goes on gathering momentum and finally assumes the shape of full-fledged depression - the first stage of the trade cycle is complete. The 1957-58 recession in the USA was a severe one.

The various phases of the business cycle can be illustrated in the diagram as below.

Phases of Business Cycle

In this diagram, PM is the full employment line. Above this line, we have two stages of the trade cycle, a boom in the upswing and a recession in the downswing. Below this line again, we have two stages of the trade cycle, a recovery in the upswing and depression in the downswing. The business cycle as shown in the diagram passes through five stages. It starts with depression to be followed by recovery, prosperity, boom, recession, and ultimately ends up again with depression.

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The Theory / Principle of Acceleration | Limitations and Assumptions of Acceleration Theory

The multiplier and accelerator are not rivals but parallel concepts. While the multiplier shows the effect of investment on consumption (and employment), the accelerator shows the effect of a change in consumption on investment.

According to Hayek, “Since the production of any given amount of final output usually requires an amount of capital several times larger than the output produced with it during any short period (say a year) any increase to final demand will give rise to an additional demand for capital goods several times larger than the new final demand.”

 

The principle of acceleration states that if demand for consumption goods rises, there will be an increase in the demand for the product. The accelerator therefore makes the level of investment a function of the rate of change in consumption. In other words, the accelerator measures the changes in investment goods industries as a result of changes in consumption goods industries.

The idea underlying the accelerator is not so much one or ever-rising demand as of a functional relationship between the demand for consumption goods and the demand for the machines, which make them. The acceleration coefficient is the ratio between the induced investments to a net change in consumption expenditure.

Symbolically, 

α = ∆I / ∆C 

where, α stands for acceleration coefficient;

           ∆I denotes the net changes in investment outlays and 

           ∆C denotes the net change in consumption outlays.

Suppose an expenditure of 10$ billion on consumption goods leads to an investment of 20$ billion in investment industries, and then the accelerator is 2. It could be one or even less than that. In actual practice, however, increased expenditures on consumption goods always lead in increased expenditures on capital goods. Hence accelerator is usually more than zero. Where a good deal of capital equipment is needed per unit of output, acceleration coefficient is positive and more than unity.

Sometimes, the production of increased consumer goods does not lead to an increase in the capital equipment producing these goods. The existing machinery also wears out on account of the constant use, with the result than the increased demand for consumer goods cannot be met. In the absence of induced investment and the acceleration effects, the increase demand of consumption goods leveled off and the accelerator, which measures the effects of induced investment as a result of changes in consumption, did not seem to work during these years.

The actual basis of the acceleration principle is the knowledge that the fluctuations in output and employment in investment goods industries are greater than in consumption goods industries. Acceleration has greater applicability to the industrial sector of the economy and as such it seeks to analyze the problem as to why fluctuations in employment in the capital goods industries are more violent than those in the consumption goods industries. There would be no acceleration effects in an economy that used no capital goods. Hence, acceleration principle has been widely used to explain fluctuations in economic activity, especially in the investment goods industries.

Thus, the acceleration principles hold that investment demand is dependent on increases in output, because such increases put pressures on firms to expand their stocks of capital goods. In this theory, investment occurs to enlarge the stock of capital because more capital is needed to produce more output. Firms may be able to produce more output with existing capital through more intensive use, but there is, at any time, a particular ratio of capital to output that firms consider optimum. At any time, there is a particular ratio that is the desired ratio for the economy as a whole over time, this ratio will changes as the mix or output changes. In order to reduce the complication, it is assumed that this ratio remains unchanged or constant over time. With K representing the capital stock, Y the level of output and W the capital output ratio, we have 

K = W Y

K (the desired stock of capital) will change over successive time periods only with changes in output (Y). Denoting a particular time period by t, preceding time periods are t – 1 and t – 2 and future of subsequent time periods are t + 1 and t + 2. Assume that in the preceding period (t – 1) the desired capital stock was enough to produce the level of output of the period t – 1. That is

Kt-1 = W Yt-1

Its output rises from Yt-1 to Yt, the desired capital stock would also rise from Kt-1 to Kt that is:

Kt = WYt

This increase in the desired stock of capital is Kt – Kt-1

To get this increase in capital stock, additional net investment is needed – this net increase in net investment expenditure is equal to the change in capital stock, that is,

It = Kt – kt-1 ………………………. (i) 

Where, it is not investment in period t. By substituting WYt for Kt and WYt-1 for Kt-1, we get

It = WYt – WYt-1 = W(Yt – Yt-1) …………………………….. (ii)

This equation simply means that investment during a particular time period (t) depends on the changes in output from ‘t-1’ to t multiplied by capital output ratio (W). If Yt > Yt-1, the equation shows that there is positive and investment during the period ‘t’. If, however, we want to show gross rather than net investment, all that it needed is to add replacement investment to both sides of the equation. This replacement investment is taken to be equal to depreciation and in shown by Dt, we have thus;

It + Dt = W (Yt – Yt-1) + Dt

The sum of It and Dt cannot be less than zero. If Ig represents gross investment in period t. We have, 

Igt = W (Yt – Yt-1) + Dt …………………………. (iii)

Investment will respond to changes in the level of output shown by the equation only if certain assumption are satisfied, the most important being the absence of excess capacity, if Xt shows the excess capacity at the beginning of the period t, we may rewrite equation (iii) as;

Igt = W (Yt – Yt-1) + Dt – Xt

Whatever the level of gross investment might otherwise be in t, it will be reduced by the amount of Xt. It’s the value of W(Yt – Yt-1) + Dt happened to be equal to an less than Xt then Igt would be zero, the minimum possible for gross investment in plant equipment.

Limitations and Assumptions of Acceleration Theory

The acceleration value may be considerably reduced as account of some practical limitations and assumptions:

1. No excess capacity: If there is already excess capacity in the consumer goods sector, a rise in demand for consumer goods will not lead to any induced investment or acceleration effects, because the increased demand may be met from the existing capital and machinery without producing additional capital goods. This will be a case of zero gross investment and is the typical case during the initial period of recovery phase of the trade cycle.
2. Surplus capacity: The operation of the principle depends upon the presumption that there is surplus capacity in the investment goods industries. If it were not so and no excess capacity existed in machine making industries, an increase in the derived demand for machines could not result in an increased supply of machines. Hence, the principle of acceleration depends upon very tough conditions that there shall be excess capacity in one industry (investment industry) but no excess capacity in other (consumer goods industries).
3. Capital output ratio: It is based on the assumption that there is a constant ratio of the output of consumer goods and capital equipment needed for their production. In reality thus ratio is not constant. Apart from the inventions and improvements in the technique of production, existing capital equipment may be worked more intensively. The capital output ratio also varies in different phases of the business cycle and does not remain constant.
4. Nature of demand: An increase in the demand for consumption goods must be more or less permanent in nature to have acceleration effects. A purely temporary increase in the demand for consumer goods will not lead to any addition in the capital goods. Durable capital goods are expensive and no producer will order capital goods that increases in demand in short level. This also shows that the acceleration is not based on merely technological factors but also no profit expectation.
5. Availability of resources: The working of acceleration principle is further impaired by the availability of resources and the ability of the machine making industry to produce more machines. In order that the increased demand for capital goods is followed by an increase in the production. There must be enough unemployed factors available for employment in the capital goods industries. This is possible only when there is widespread unemployment in the economy.
6. Elastic credit supply: The elastic supply of money and credit is another factor, which helps, in the smooth working of the acceleration principle. Whenever there is induced investment as a result of induced consumption, enough money and credit should be forthcoming for investment in investment goods industries. A scarcity of money and credit will raise the rate of interest and will make investment financed by borrowed funds easier. It is, therefore, essential that the rate of interest not be allowed to rise and that there is enough credit to allow for the acceleration effects to flow.

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Causes of Labour Disputes in Nepalese Organization | Settlement of Labour Disputes

There are the different conflicts or strike between workers and the management. They manifest in the form of strikes, lockouts and other industrial actions. They can be individual disputes or collective disputes. It can be between the employers and workers, among the workers, between employers and the government.

This types of disputes may be either right disputes – dispute over right or interest disputes – disputes due to conflict of interests. Labour disputes may result in loss of production, loss of profit, loss of market shares, low employee morale and finally the closure of the organization.

Causes of Disputes

There are many causes of labour disputes. They can be broadly divided into three categories.

1. Economic causes: They can be:
1. Compensation demands: They relate to wages, benefits and services. Inflation demands more rise in payment because the cost of items becomes expensive day by day. Employers want to pay the least and workers want to get the best in terms of wages, benefits and worker to get the best in terms of wages, benefits and welfare.
2. Bonus: There may be dispute regarding providing no bonus or low bonus to the workers by the management.
3. Working conditions: The working environment may not be acceptable. The working hours may be a problem too.
4. Condition of employment: The disputes may arise due to the terms and condition of employment.
5. Industrial sickness: Economic recession, defective taxation policies and changing competitive forces make industries sick. This may require lay-off or downsizing of organizations.
2. Managerial Causes: They are usually the unfair treatment of the union members or non-recognition of union by the management. They are manifested by; 
1. Non-reorganization to labour union: Employers usually hate recognizing the labour union, this are the root cause of disputes.
2. Lack of consultation in recruitment and selection process: Employers do not consult labour unions for recruitment and selection process, transfer, promotion and development of employees; these become the causes of disputes.
3. Job-security: Employers like to hire employees at their own. Workers see the practice as threatening to their job.
4. Disciplinary actions: Disciplinary actions are related with attendance, job behavior, dishonesty and outside activities of workers are the major causes of disputes.
5. Lack of proper and effective communication: The employers usually try to avoid talking with unions or workers about solving any situation and this lack of communication become a problem. 
3. Political Causes: They are the result of political interference, union rivalry, collective bargaining and multiplicity of labour laws. Most trade unions are affiliated with some political parties. The politicization allows the interference of politicians to the labour affairs and creates a problem for smooth relations with the management. Politicization also divides the trade unions on ideological lines. Unions break and disintegrate. Political pressures influence collective bargaining, which makes settlement difficult and complex and agreement is not reached. The interpretations of labour regulations may be a problem.

Settlement of Labour Disputes

It is better that the disputes are settled as early as possible. The methods available are;

1. Collective Bargaining: This refers to the negotiation, settlement and administration of a time-bound agreement between labour and management to settle disputes. Representatives of labour and management sit together and negotiate to settle the disputes. It is a “Peace treaty.” This is the most widely used method for the settlement of labour disputes. It benefits both labour and employer. It is democratic phenomenon. However, problems arise when agreement are not reached. Interpretations of the agreement also cause problems. 
2. Grievance Handling: This is a complaint filed and is perception of a worker’s unfair treatment on the job. This may be due to interpretation difference relating to employment contracts or collective bargaining agreement or unfair management practices; or personality trait of workers; or antagonistic organization culture. Grievance handling is a challenging stuff and facilitates upward communication. They are usually fame consuming and costly.
3. Conciliation: It is a process whereby a third party provides assistance in setting disputes. The settlement of the disputes depends on the agreement of the parties involved. The third party acts as neutral and does not impose their own decisions but beings the two parties closer.
4. Mediation: It is a process whereby the third parties are more active and submits proposals for dispute settlement. The party involved in dispute is free to accept or reject such proposals.
5. Adjudication: It is a process of mandatory settlement of a dispute by ordinary courts, labour court or a tribunal. This method only deals with disputes. The verdict of adjudication is binding on both the parties.

 SOME RELATED LINKS: 

• Concept of Labour Relation and Process of Labour Relation

• Meaning of Unionism | Process of Unionization | Labour Legislation

• Collective Bargaining and Importance of Collective Bargaining

• Contemporary Issues in Labour Relations in Nepal

• Process of Collective Bargaining as a Mechanism for the Settlement of Labour Disputes