Causes of Business Cycle: Important Factors

Causes of Business Cycle are very common in a capitalistic economy. Sometimes there are periods of good trade (prosperity) followed by the periods of bad trade (depression). This tendency of business activity to fluctuate regularly between prosperity and depression is called Trade Cycle. Following are important causes of business cycle in any country.

1:- Natural Factors;-

Trade cycles may take place due to certain natural reasons. For example during the period of legs rain falls agricultural productivity is badly affected. It causes shortage of industrial raw material and therefore industrial production also decreases. If this situation persists for some time it reduces economic activities in the whole economy. On the other hand                good weather   helps     increase in agricultural activities and expansion of economic activities.

2:- Wars

During the war economic activities are slowed resulting, in recession whereas after end of war more investment is encouraged due to more demand in the economy. It helps to expand economic activities and period of recovery starts in.

3:- Political Factors

In developing countries governments are changed frequently. The new government formulates new policies and abandons the policies of previous governments. This creates uncertainty in the economy and causes business activities to slow down. On the other hand when businessmen feel continuity of existing political setup, they build up confidence and make investment in new projects. This causes up turn in business cycle.

4:- Supply of Money

Unplanned changes in supply of money causes business fluctuation in economy. An increase in the supply of money cases expansion in aggregate demand and economic activities. But excessive increase of credit and money also set off inflation in economy. On the other hand decrease in the supply of money initiate recession in economy.

5:- Future Expectation

Expectations about future business is also a major cause of trade cycle. When businessmen are optimistic about future it triggers expansion in business activities where as pessimism about profits in future results in contraction of business activities which initiate recession in economy.

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6:- Population Explosion

An abnormal increase in population is also a major cause of economic problems. When population increases at higher rate than increase in national output. It becomes difficult to provide employment to all the labor force. Limited national resources are put to non-developmental use. Such a situation usually brings about recession in economy.

7:- International Factors

Now a days all the countries of the world are economically interdependent. Any economic fluctuations in big economies like USA or Japan etc affect the economies of the rest of the world. A recession in USA will reduce its exports from Pakistan and therefore causing problems for export industries. On the other hand if there is boom in USA, Pakistan’s export to USA will increase and it will trigger more production and more employment in Pakistan.

8:- Economic Policies:-

Sometimes businessmen consider Government’s economic policies against their business interests. In such situation they may transfer their capital to other countries or make investment in non­productive businesses. Due to these factors unemployment increases in the economy and business activities fall to cause recession.

9:- Reduction in Credit

When banks reduce credit for business or increase the rate of interest, it definitely encourages new investment. Even existing business person start withdrawing their money from business. This situation brings down turn in business. On the other hand if credit is available at cheap interest. It encourages investment and brings about prosperity in economy.

In the above discussion only important reasons have been explained. In fact there are also so many other causes of trade cycles. These causes are different in different countries and these also vary at different phases of trade cycle. For example an act of terrorism may cause recession in affected country. Similarly situation of law and order, level of literacy and social behavior of people are all different factors which determine prosperity or poverty of a nation.

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