Business Cycles

Discussion ¹

²

• $y\ast$ is synonymous to multiple things: income, GDP
• Growth will not remain at 9%, it will change over time
• Business means your economy and not just that entity that does transactions.
• We will find business cycles mostly into a Market driven economy (private sectors).
  • They are a feature of a capitalist economy
  • In this, they just want to make profits
  • So, they will layoff if it can improve profits (unlike public sector)
  • A private bus service from PTP to Hyderabad was stopped because there were not enough passengers going (not profitable). But the APSRTC still runs with no to two people because it is for the welfare for the people

Schools of thought

• Classical³
• Juglar⁴¹
• Schumpeter⁵
• Monetarist²
• Keynesian⁶

We will discuss two:

1. Kaldor’s Business Cycle
2. Real Business Cycles

Footnotes

1. What are the causes of the fluctuations? What to do in order to go back to the equilibrium point. ↩ ↩²

2. Monetarists believed that the fluctuations are because of money supply ↩ ↩²

3. The need for business cycles didn’t arise in the literature of classical models because they always believed in full employment ↩

4. Earlier, Juglar talked about these fluctuations and called it “Trade cycles”. It is defined

   • Prosperity (up)
   • Crisis (down)
   • Spread (the time-gap it takes to rise back to prosperity)
   ↩

5. Schumpeter talked about the Innovation theory

   • the business cycle has 4 phases
   • 1. Prosperity, 2. Recession, 3. Depression, 4. Recovery
   • Innovation: finding something new compared to traditional ways, are the cause for the fluctuations
   ↩

6. Even Keynes didn’t talk about business cycles, but what he hinted on was that MEC is the most ↩