Login with Facebook

Determinants of business cycles fluctuations

If businesses were operating in a perfect environment, there would be no reason to worry about recessions and failures. A perfect business environment is where all the necessary requirements are met, and there is an equilibrium between supply and consumption. In such an environment, there is not monogamy, and no firm has the incentive to alter the prices set by the markets. Everything works in perfect harmony with supply equal to demand. Consumption is high because there is perfect information, and consumers know everything about the products – manufacturers also share information freely. In such an environment, every participant is satisfied.

But this is far from the modern business environment. The condition described above is only theoretical. In other words, it is only used as a point of reference for what businesses should look like. The true condition of the state is the imperfection competition. Some firms within markets are biggest than others, and they drive the price of commodities. Since they are seen as producers of standard quality products, their products are valued higher and target the higher market whereas the other the class if left with cheaper products for the lower market. This just the nature of the business, and there is nothing anyone can do about it.

One thing common for both conditions is the business cycle. Economies are never stable. At one point, markets would be experiencing the best inputs and outputs, with pricing heading towards stability, and another point consumption would be dropping, forcing a different direction of prices. Business cycles are important determinants of economic conditions in the world. When things are working well within markets, the same condition is extended to the general economy. And when markets are overwhelming by internal and external factors to the point of failure, the same is spread to the economy. This is where you will find different governments coming up with fiscal and monetary policies to help such businesses stay on the cause. Initiatives to revive such a market can involve the government buying or selling shares to and from the involved parties.

Business cycle fluctuations are related to the volatility of economic growth and the different stages of an economy. Consider the Great Recession of the 2008/2009 financial markets failure that spread across many other economies, for instance. It all started with a burble, with markets seemingly stable and doing well. Financiers became comfortable and loosened their lending terms greatly. Most assets used to cover loans from borrowers come from the housing industry, which boomed at the moment. And because the economy seemed to be at its best, the lenders did not take much consideration into vetting the ability of the borrowers to repay the loans. It was not until the value of the collateral properties dropped significantly that this mistake becomes apparent. Now they only relied on the truthfulness of the lenders to repay. Those who could not recover their investment went into a state of depression, with may failing completely.

Different factors are responsible for business cycles. In some instances, it could be the cause of only one factor, whereas, in other situations, it could be a combination of different reasons. Such factors include interest rate, confidence, credit cycles, and multiplier effect. Some economies focus on the supply-side explanation of business cycles mentioning factors such as technological shocks. Business cycles are a long process that happens over a certain period of time. One business cycle is measured and counted from the end of the previous cycle. For example, economists can look at the quarterly economic growth in the UK between, say 1978 and 1995. In this case, they will pick the two recessions of 1980 and the one in 1990/1992, and compare them to the periods of the recovery and boom that preceded or followed.

The average rate of economic growth in the UK is about 2.5%. This, therefore, means that the long-run trend rate of this economic growth around this percentage. But this is not the actual growth rate. The truth is, the actual growth can vary widely from the average because it goes through different stages of the business cycle. Consider the case of the 1980s period, for instance. There was a rapid growth of the economy by more than 4%. Many became comfortable with the condition and rushed to make their investments without considering many risk factors. And when it was discovered such growth was not sustainable, it led to inflation, and later to the recession of the early 1990s.

Phases of a business cycle

There are four major phases of business cycles;

The economic growth

This is where the boom is witness. There is a real increase in the output causing and increase in supply as demand surges as well. Everything happens right within the economic environment. The markets are enjoying more liquidity, with consumers taking advantage of stabilizing prices. Producers are all in the right condition as prices of goods keep increasing with demand. There are a low inflation rate and unemployment, making more people more comfortable to spend than save. Lenders at this period lessen the lending terms, and borrowers show promise of repaying with ease.

Economic boom

In the period preceding the 2008/2009 recessions, there was an economic bubble, an economic boom, characterized by faster growth of an economy, which tends to be inflationary and unsustainable. It is a rapid growth of an economy that leads markets into believing businesses are all doing well, and the rate of consumption is increased. Everything is on an upward trend, including price within a market. Such a condition attracts more competition, which later ends up with adverse effects. It may seem like competition is good, but when it leads to poor market conditions in the long-run, such as a risk most markets will not hear of.

Economic downturn

And economic boom can be compared to an elastic rubber band. When you apply pressure to it by pulling, it stretches as far as possible until it hits its elastic point, and it cannot stretch any further. This point is like the peak of an economic boom. From here, the economy can only head down. The economic downturn is described as the condition where economic rate falls, and the economic growth becomes negative, extending towards recession. It is at this point that markets start putting into action precautionary measures to protect themselves from impending failure.


This condition is the opposite of economic growth. It is initiated by an economic downturn that leads everything towards the negative. A recession happens when there is a period of negative growth, and there is a big drop in real output. Whereas economic growth ends at the peak, economic recessions end the trough – the lowest point at economic growth can drop to. This is where many markets fail, and governments are forced to come up with different fiscal and monetary policies to restore the economy.

What determines the business cycle?

There are a number of factors that cause business cycles. The most common ones include the following:

Interest rate and exchange rates

Businesses depend on borrowing funds for their expansion. In this case, the rate of lending becomes critical, both in terms of making a profit and comfortably repaying the loans. When interest rates change, therefore, they affect consumer spending and economic growth at large. For instance, if these rates are cut, they reduce borrowing costs while increasing disposable income for consumers. In this case, the end result becomes higher spending and economic growth. But if the Central Bank decides to increase the lending rate, it discourages consumers from borrowing, which reduces spending and investment, such a condition will lead to an economic downturn and recession. In 1991-92 the recession that happened was attributed to high-interest rates. Note, however, that sometimes the interest is increased or reduced to control the economic cycle.

Trade between countries is one of the major contributors to economic growth. This is where exchange rates come in. Countries always struggle to ensure their currencies are higher in value than others so that they can be favored in exchange rates. High economic rates can scare potential investors away while very low rates can devalue the goods from the involved country. This means, for a stable economy, a country must ensure stability in the exchange rates. This affects most firms that operate across international borders.

Changes in house prices

During the period leading to the 2008/2009 Great Recession, the price of houses was surging. It was, for this reason, the lenders become too comfortable and started offering loans without properly investigating the ability of the borrower to repay. This rise created a positive wealth effect and led to higher consumer lending. And then house prices dropped abruptly, leading to less consumer spending at the banks. This led to one of the worst economic recession the world has ever seen. Many businesses dropped in output and went out of the market completely.

Consumer and business confidence

Business market and advertise a lot because they want to make a good reputation for the consumer. People are rational decision-makers who are easily influenced by external activities. This means anything happening within an economy affects how they make decisions. If, for instance, there is a succession of bad news, this tends to discourage consumers from spending and investing, this condition can create a big recession out of a small downturn. When the economy recovers, this situation can create a positive bandwagon effect. The good economic growth is where consumers are ready to easily borrow and banks to lend, which leads to higher economic growth. Confidence is a critical factor in the business cycle.

Multiplier effect

In the multiplier effect, the fall in projections can cause a big final fall in the real GDP. For instance, if a government reduced public investment, there would be low aggregated demand and a rise in the unemployment rate. This means those who lose their jobs will spend less too, which leads to an even lower demand within and economy. The most rational step would be to inject investing in the markets, which gives rise to a positive multiplier effect.

Accelerator effect

This effect states that the rate of investment depends on the rate of change in the growth of an economy. If there is a fall in the growth, it leads to reduced investment, which means firms reduce their investment because they do not expect a quick rise in the investment. According to this thought, investment is more volatile, and small changes in the growth rate can greatly affect investment levels.

Lending and finance cycle

During the 2008 recession, there was less emphasis on the condition of the financial system. But the credit crunch of this period become a major contributor to the recession that followed. There was a boom in credit and lending, especially in sub-prime lending across the US, which promoted economic growth during the 2000s. However, banks were stretched beyond their elastic point and needed to call for a loan. The credit crunch has since created more attention to theories of financial stability.

Inventory cycle

Some economists believe that there is a natural inventory cycle. For instance, there are certain goods referred to as ‘luxury goods’ that consumers but every three years or so. In a downturn, consumers delay buying these goods, which leads to a bigger downturn.

Recession and its cause

A business cycle can go into recession as influenced by a set of different factors. Some of the major factors include falling house prices, which cause a negative wealth effect and lower spending from consumers. This effect is similar to a credit crunch that causes and increase in the cost of borrowing and a shortage of funds. Apart from these, volatile stock, higher interest rates, tight fiscal policy, and appreciation of exchange rates are all part of the wider cause of business cycle fluctuations.

The business cycle has a huge impact on the general economy. Some experts look at it as an essential aspect of economic development and growth. This means even downturns play an important role as it tends to ‘shake and sieve out’ the economy, getting rid of ‘unwanted weed.’ Only the strong survive. Neverthelessbusiness cycles, this view remains highly controversial.

Author: James Hamilton


Need a custom

We will write it for you.
Order now

Free Essay Examples

Free essays:

An insight into the error-correction models
All you need to know about management discipline?
A historical overview of Financial Crises
All you need to know about reaction kinetics?
Basics the Game Theory in Cryptoeconomics
Business innovation ideas for making money
Biosensors for cancer diagnosis
Business Analysis: Pricing strategies and Demand Curve
Contracting with Moral Hazard and Adverse Selection
Conflict management in an organization
Can social media help overcome the problem of illiteracy?
Cultural heritage of indigenous people.
Digital Illiteracy
Determinants of business cycles fluctuations
Determinants of Unemployment and Inflation
Different tissues of the body
Economic Analysis of Market Structure
Expected Utility
Everything you need to know about workplace diversity
Efficiency and Market Equilibrium
Factors Affecting Purchasing Behavior
Financial Statement Analysis
Factors Influencing Interest and Exchange Rates
Fiscal and Monetary Policies in Response to 2008/2009
Game theory in microeconomics
Globalization: definition, causes, social impact and risks
Gene expression: what it is and why it is important
Global environmental issues
How to conduct economic research?
How to define the Enterprise Value
How cancer is developed - Cancer biology
How can financial illiteracy harm you?
Illiteracy in the USA
Importance and seven principles of quality management
Intermediaries and Government in Financial Crisis
Introduction to Econometric Application
Journalism: What is News?
Journalism: Broadcast media and Television Presenters
Journalism: Sources of News
Journalism and Law
Key Determinants of National Income
Key Factors That Affect Pricing Decisions
Kinetic models in biology and Related fields
Know about the different forms of traditional African dances
Latest technology trends
Latest dance trends
Methods of labeling of nucleic acid that enable their detection
Macroeconomics: International Economic Issues
Neuromuscular disorders
National Economies, Fluctuation, and Responses to Fluctuations
Neurotransmitters: what they are and different types
Nanomedicines to target tumors
Organizational motivation and its effects
Overcoming Hiring Challenges for Nonprofit Organization
Protection of cultural heritage in times of war and peace.
Principles of Corporate Governance.
Risk Sharing in Insurance and Asset Markets
Risk and the value of information
Reverse discrimination.
Role of media in wartime.
Segregation in the US.
Stages of the Consumer Decision-Making Process
Structure and function of blood vessels
Skills in Journalism: Effective Interview
Theories of Public Policy
The Economics of Uncertainty – Introduction
The different medical imaging techniques
Tips for labeling medical devices- Medical Entrepreneurship
Understanding Auctions and Auction Theory: Part 2
Understanding Auctions and Auction Theory: Part 1
Use of Machine Learning in Econometrics
Understanding Public Policy
Various theoretical perspectives of sociology
Virtual reality, what it is and how it works
What is Immune System and Immunotherapy?
What are the methods of valuation of companies?
4 Facts about Origin of Mathematics!
5 techniques to create an animation
10 emerging technologies according to World Economic Forum
10 strategies to maximize corporate profits
3d Model Of Building
6 Medical Technologies that revolutionized the healthcare in 2020
All you need to know about the ACA Code of ethics
Architecture and Democracy: An Introduction
Architecture and Democracy: Democratic Values
Architecture and Democracy: Democratic Procedures
All You Need to Know About a Synthesis Essay
An essential guide to understanding Film Theory
Application of Artificial Intelligence in Cyber Security
Applications of electrical engineering
Augmented reality: what it is, how it works, examples
Advantages And Disadvantages Of Social Networking
All you need to know about Cryptography
Applications of astrophysical science
All you need to know about architecture engineering
Applications of geological engineering
Artificial intelligence and medicine: an increasingly close relationship
An insight into Computational Biology
ACA code of conduct
A Rose for Emily
Applications of Mathematics in daily life
Architecture mistakes to avoid
All you need to know about Toxicology
All you need to know about Holistic Medicine
All you need to know about linguistics
An introduction to Linguistics and its subfields
All you need to know about Anxiety disorder
All you need to know about Drones
A Brief Insight into Political Science
Assumptions related to feminism
All you need to know about Byzantine emperors
All you need to know about labour economics
An insight into xenobots -the first-ever robots
An ultimate guide about Biomaterials
A Comprehensive Introduction to the Mona Lisa
Analysis methods of Transport through biological membranes
An ultimate guide about biochemical reactions
Analysis of brain signals
Artificial Gene Synthesis
Application to synthetic biology of CAD methods
All you need to know about metabolic pathways
Applications of BIOMEMS
All you need to know about the epidemiology
Asian vs. western leadership styles
All you need to know about Smart prosthesis
Analysis of Economy: Output of Goods and Services (GNP), and GDP on Economic success
A Guide to Pricing Strategies
An Overview Of Economic Studies
Analysis of Fiscal and Monetary Policies
Analysis of Business Cycles
Analysis of Consumption and Investment
A Look into Regression Analysis
Analysis of Household's Consumption and Savings Behavior
All you need to know about Capital Budgeting
All you need to know about risk management
Art looted in wartime.
Appropriate use of Data in Economics
All you need to know about reaction kinetics?
A historical overview of Financial Crises
All you need to know about management discipline?
An insight into the error-correction models
How to Write a Personal Essay
Housing Needs in America
How to Write a Description Essay
How to Create an Excellent Scholarship Essay?
How to write a cause and effect essay
How to Hire the Best Essay Writing Service Provider?
How to Write a College Application Essay?
How to get the most out of your English lectures
How to write Expository Essay
How to succeed in your psychology class?
How to Write an Academic Essay in the Shortest Time?
History of Journalism
How Different Sectors are Using Artificial intelligence (AI)
How to write an informative essay
How to deliver persuasive essays?
How to Give a Convincing Presentation
How to write an essay on leadership?
Historical Art Still Around Today
Humanoid robot: what it is, how it works and price
History of Chemistry
Healthcare Advanced Computer Power: Robotics, Medical Imaging, and More
Healthcare AI: Game Changers for Medical Decision-Making and Remote Patient Monitoring
How to understand different types of English
How to Cope with Chronic Pain
How African American choreographers and dancers have influenced American dance
How mobile robot can do in logistics or in production
How To Become a Successful Entrepreneur
History of the Philosophy of Feminism
How is the climate changing?
How to Track Your Content Marketing ROI
How to Gun control In the USA?
Historical and contemporary role of labour in the modern world
How breast cancers are classified?
How the cells of our body communicate?
How the Lymphatic System Works?
How Digestive System Works
How to complete your capstone projects effectively?
How to write a research project
Healthcare technologies that help patients with better self-management
How to choose the topic of the senior capstone project
How to make your business survive at economic crisis
How can immigrants blend in the American society?
How does the economics of war affect society?
Hate speech on social media.
How to Build an Economic Model
How to start a healthcare startup?
How can financial illiteracy harm you?
How cancer is developed - Cancer biology
How to define the Enterprise Value
How to conduct economic research?
Introduction to Urban Studies
Importance of dance in education
InMoov: how to build an open source humanoid robot
Importance of KYC verification to making the Blockchain secure
Importance of Rhythm
Importance of dance student evaluation
I/O control methods -types and explanations
Identity theft: what to do?
Introduction to Utilitarianism
Importance of 3d Modelling in Architecture
Importance of online journalism
Image processing in medical diagnosis
Introduction to USA Politics
Introduction to Comparative Politics
International Relations as a Major in Political Science
Importance of modern trade policy
Introduction to Journalism
Introduction to Writing a TV Script
Introduction of Microfabrication techniques
Introduction to Microeconomics
Interaction of Consumer and Firm Choices in Markets
Importance of corporate sustainability
Issues in International Monetary Macroeconomics
Introduction to Statistics and Data for Economics
Introduction to Data and Probability for Economics
Introduction to the Game Theory
Introduction to Econometrics
Introduction to Economic Information
Introduction to Market Equilibrium
Introduction to Economic Models and Application
Introduction to Empirical Research
Introduction to Econometric Data
Importance of Critical Thinking, Principles, and Goals
Introduction to Identification and Causal inferences
Introduction to Econometric Application
Intermediaries and Government in Financial Crisis
Importance and seven principles of quality management
Illiteracy in the USA
The Looming Energy Crisis in America
Top benefits of performance-based engineering
The More Languages You Know, The More Times You Are a Man
Things to consider while writing an Argumentative Essay
Top Ways to Improve Your Academic Writing Skills
Tips to Excel in Creative Writing
The origins of films in the early 19th century
Top career options in Architecture
The Elevator Pitch
Top finance trends 2020
The basic Structure and functionality of robots
The Way to Success
The election system of the President in the United States of America
Two-party System in United States of America
Top trends in urban design
The history and theory of African American filmmaking
Top benefits of creative writing
Tinnitus Guide: Common Symptoms and Treatment Options
The language of dance
The digital image processing management
Top famous politicians of the World
Top methods of political science!
The history of the feminist movement
The blood flow in cardiovascular system - Biofluid Mechanics
The best of Leonardo Da Vinci
The Structure and Function of Macromolecules
The structure of cell: a research on the bricks of the human body!
Tissue and organ construction: Adhesion and recognition between cells
The kinetics of the transformation processes
The Modeling of Biological Systems
Tips for writing a great thesis statement
The Defense mechanisms against infections
The impact of the technological innovations in medicine
Top journalism trends to know about
The relation between mass media & politics
Theranostics: Diagnosis and Care through Nanoparticles
The practical Applications of X-rays
The applications of Ultrasound in medicine
Transfer mechanisms of genetic information in Bacteria
The regulation of cellular metabolism in the diagnosis
The Principles of MRI Contrast agents
The technical basis of optical coherence imaging
The New Media: Emerging Trends
The Structure of Interest Rates and the Yield Curve
Technological perspectives and reflections of neural engineering
Types of bioreactors and their applications
The Role of Government Policy in Improving Economic Outcomes
Types of corporate responsibility
The Role of IMF in International Monetary Macroeconomics
Tools for investment decision making
The concept of Organizational Culture and its applications
The Conduct of Monetary and Fiscal Policy
The Basics of Financial Accelerator Models
Tips for labeling medical devices- Medical Entrepreneurship
The different medical imaging techniques
The Economics of Uncertainty – Introduction
Theories of Public Policy
What is a Definition Essay?
What are diagnostic essays?
What is the relation between art structural engineering?
What is a Narrative Essay
What are robotics and intelligence systems?
What are the benefits of studying health sciences?
What is artificial intelligence and why it matters?
What is comparative Literature?
Why study neuroscience
What is Wi-Fi and how does it works
What is French history famous for?
What are Humanistic Studies?
What is covered in Biophysics?
What is modern journalism?
What is Virtualization? Benefits & Applications
What are modern public relations?
What is plasma physics?
What is teacher preparation?
What is rapid prototyping for 3D printing?
What is contemporary European Politics?
Why should you learn American Ballet?
What is engineering physics?
What is the purpose of African American Literature?
Ways to learn the Rhythm
What is digital art used for?
What are Enzymes and how do they work
Who is the father of political science?
Why Study Political Science - Job?
What is the Philosophy of Feminism?
What is a quantum computer?
Ways B2B Startups Streamline Their Conversion Strategies
Why do biomedical signals need processing?
What are the long term effects of climate change?
Why study labour relations
What is Holoprosencephaly?
What is antisocial disorder?
What are the important principles of evolution?
What is the cytoplasm and its function?
What is biopolymers?
What Makes a Good Leader
Women empowerment in modern generation
What is the history of political thought?
What is Gene recombination
What is synthetic biology
What is business cost analysis?
What is Inflation
What are the consequences of unemployment?
What is lithotripsy and its types?
What is transition elastography?
What is the purpose of deep brain stimulation?
What is a Brain-Computer Interface (BCI)
What is neuroethics?
What is Market and Supply and Demand
What is optogenetics?
What are the techniques to record brain activity?
What happens if the interest rate increases?
What is immunotherapy?
What is the economic role of the financial market?
What are the factors behind illegal immigration?
What is the lymphocyte activation?
What is financial market and its types?
What is the structure of financial markets?
What are the methods of measuring business performance?
What is the Credit market?
What is business ethics and code of ethics
What are the Causes of financial instability?
What is MBA with Concentrations
What is regenerative medicine?
What is Population ecology?
What is Microfinance: evolution, and practices?
What is biotechnology and its applications?
What are Workplace diversity and its benefits?
What is the difference between a leader and a manager?
What Is Branding and best branding Business strategies?
Why are microelectronics important?
What are biologic drugs.
What is the Foreign Exchange market?
What is the role of scientific research in times of crisis?
What are the risks of international trade?
What is financial management?
What is gene therapy?
What is education economics?
What is regression analysis, and why should you use it?
What Is Technology Marketing And How Should It Work?
What is Management Accounting
What are the methods of valuation of companies?
What is Immune System and Immunotherapy?