Analysis of Business Cycles - Essay Example

Analysis of Business Cycles Business cycle involves production fluctuations in the economic sector. This paper will focuson mechanisms of crisis theories and articulate on variables that highlights what business cycle entails. The paper will also assess the variables in relation to the U.S 2007 business cycle. Introduction Business cycle is production fluctuations that are present in the economic sector. The fluctuations take place around a growth trend that is long term and involves the transfer over a period that denotes rapid growth in the economy accompanied with periods of relative reduction.

These cycles are usually considered through a rate in growth of real gross in domestic product. The mechanics of crisis theories One of the groups of crisis theories that explain economic crises is possibility theories. These are identified into two main groups: underconsumption theories and wage squeeze theories. Underconsumption theories argue that the money value of its net product equals the sum of wages paid to workers, in addition of returns generated by, capitalists (Bottomore, 1991). It is also argued that workers consumption generates a demand gap.

However, capitalist’s income is saved instead of being consumed, and this is what is viewed as leakage from demand. The rationale of this implication is that if the gap created by capitalists savings is not filled, part of the product would not be put up for sale or even if they were to be sold, at least not at normal prices. When this happens, according to Bottomore, (1991), the capitalists experience low profits and the end result is that they are forced to consume almost all their income.

What this implies is that there would be no net investment, thus no growth. Nonetheless, the demand gap can be filled by consumption and investment demand. The logic here is that the greater the demand, the higher level of production and employment. The last action of the system relies on the interplay of stagnation fashioned by the savings plans by capitalists and the efforts of countervailing tendency to expand through investment plans. The key variables of the theory One of the key variables is capitalist savings.

This is a crucial component of the theory because it dictates on how the demand gap is created and how it affects growth. It can, therefore, be argued that such a move by capitalists plays a major part in affecting the business cycle. Another key variable is the filling up of demand gap (Bottomore, 1991). This is a key variable because it sets the pace for putting the business cycle in its normal course. It helps determine the growth. The other key variable can be argued to be the interplay between stagnation created capitalists savings plan and the countervailing mechanisms employed in order to expand investment plans.

The U.S economy has been experiencing an unprecedented business cycle for the last 11 years. However, the business cycle has been attributed to consumption rate, employment, and personal income (United States Department of Labor., 2007). Focusing on employment, the U.S labour market has largely been uncertain due to fiscal cliff, which tends to impede hiring rate by both the public and private employers. For example, in June 2007, to September 2007, there was a slow growth rate. This was attributed to the increase in labor demand.

However, other indicators of the job market activity show fundamental development for labor demand. In this regard, hiring sentiments recorded in both large and small firms helped payrolls to rise by 25,000, while hours worked in the private sector shot up (United States Department of Labor., 2007). In 2007, the unemployment rate is argued to have gone up.

Some of the major sectors that were considered to have contributed to this trend were food services, healthcare, and professional and technical services (United States Department of Labor., 2007). In technical and professional services, the decrease in jobs was attributed to decrease in technical consulting and professional services. Healthcare unemployment also contributed highly on the overall unemployment growth rate. This was mainly on areas like ambulatory health care services and hospitals.

Personal income depends on several factors. However, the most notable factors that could have contributed to increase in personal income in 2007 could be in terms of labor income, business venture, and part time employment. Due to fear for effects of recession, it can be argued that many people feared overspending. This led to many people saving as much as they could (Knoop, 2010). Industrial productivitity can be argued to have increased due to increase in hours worked.

However, this was also as a result of increased hourly compensation. This is correct because studies have indicated that increase in hourly compensation tend to increase output per hour (Dijk, Milas & Rothman, 2006). As the unemployment rate went up, many people could have resorted to venturing into small businesses, which ended up increasing industrial production. The trend of the data When focusing on unemployment raate, going by the theory, it is apparent that due to ressesion, many capitalists could have lacked confidence in hiring more workers for fear of running at a loss.

Additionally, it can be argued that, during this time, capitalists concentrated on saving income rather that reinvesting it. The reason behind this could be attributed to the idea that they wanted to ensure that they have enough savings to reinvest once ressesion is over (Bernd, 2002). To some exatent, the same case applied to everyone. Saving as much as one would have been able to and minisizing spending. This is what contributed to increase in personal income. When people are sure of continued flow of income, they tend to save little and maximize in spending the income (Knoop, 2010).

On contrallty, many firms tends to continue producing more products with anticipation that, after recession, demand will be high thus they needed to have produced enough to cater for that. Conclusion According to underconsumption theories, capitalist’s income is saved instead of being consumed, and this is what is viewed as leakage from demand. However, the demand gap can be filled by consumption and investment demand. Savings is a vital variable because it dictates on how the demand gap is created and how it affects growth.

Another crucial variable is filling up the demand gap. This is important because it sets the pace for putting the business cycle in its normal course. Countervailing mechanisms employed in order to expand investment plans also qualifies to be a major variable. The U.S business cycle has been attributed to consumption rate, employment, and personal income. References: Bernd, S. (2002). Business cycles in the contemporary world: description, causes, aggregation, and synchronization. Heidelberg; New York: Physica-Verlag.

Bottomore, T. B. (1991). A Dictionary of Marxist thought. Cambridge, MA: Blackwell. Dijk, D., Milas, C. & Rothman, P. (2006). Nonlinear time series analysis of business cycles. Boston: Elsevier Knoop, T. (2010). Recessions and depressions: understanding business cycles. Santa Barbara, Calif.: Praeger. United States Department of Labor. (2007). The Recession of 2007–2009.retrieved on 8th Sep 2012 from: http://www.bls.gov/spotlight/2012/recession/