Causes of Business Cycle – The Crucial Indicators Affecting Business

Nature is diversified, and so are humans too. Humans tried to be economically prosperous by using different art and tricks of business. In ancient times they use to adopt hunting, fishing and farming, and crops to survive economically. They often use a barter system in this regard. When there are prosperous times in economy & business so does depression/recession exit also, whether look at the lives of humans in the 11^th century or whether of today we find a business cycle in every era.

In all Phases of the Business Cycle, businesses face different things. Sometimes they are busy and making hundreds of dollars and sometimes spending from the capital. All the phases are backed by factors affecting

Causes of Business Cycle

There are two types of factors affecting the business cycle,

1) Internal Causes and

2) External Causes

A combination of both or any of the parent or child causes may affect.

Internal Causes of Business Cycle

Psychological Causes

Business cycles are also caused by psychological causes. In the business circle, two schools of thought exist. Optimistic & Pessimistic psychology of entrepreneurs. Optimistic thinking toward business and development brings more employment, profit, demand, and a boom in the national economy. Pessimistic psychology relates to negativity about business investment which brings unemployment, loss in business, and less demand for products.

Economic Disturbances

A business cycle always occurs when the rate of capital goes down. Similarly, boost in the economy can be measured when the rate of capital goes up.

Another factor that causes the business cycle is the interest rate for business loans. When a heavy interest rate is introduced by banks ultimately it creates a hurdle in economic peak.

Lack of Investments

During the phase of depression and trough lack of investments in business can be observed. The same situation can be seen in wars, national disasters, and climate changes in a country. When there is less investment in business ultimately can be the result.

Public Demand and Supply

In the economic prosperity phase, a balance between demand and supply can be monitored. The business cycle arises when there is less demand for products from the public and excessive supply is available. If there are more demand and less supply from producers it also causes inflation.

External Causes of Business Cycle

Political Changes

An economic cycle can also appear due to political change in a country. With the change of government, new leadership plans and implemented new policies best suited to their interest and usually avoid the continuity plans of the x government. This change caused a great setback for the national economy as well as a loss of money and honor at the international level. This practice can be observed in the U.S.A, UK, Germany, and other countries as well. After the end of the tenure of PPP in 2013, the newly elected government avoid any existing plans of the x government, the same case is with India & United States.

Wars

Wars are also an important factor in the business cycle. During War times most of the national revenue is used in the manufacturing and purchasing of weapons, and war materials. That’s why wars are called freezing times for the economy of any nation. They throw a nation back to 10 years of its economy.

Post War Rehabilitation

After wars, it may take 10/15 years for a country to rise up again economically. In the first and second world wars, participating countries like the USA, UK, RUSSIA, TURKEY, GERMANY, ITALY, SPAIN, CHINA, AUSTRIA, HUNGARY, FRANCE wars caused a great loss to the industry, agriculture, transportation, housing, and humans too. After the war years, a nation has to rehabilitate itself by using its available economic resources. In these situations, the national economy is overlooked, and rehabilitating the country becomes the utmost priority of the government which caused a setback to the national economy.

Natural Disasters

Natural Calamities like Floods, earthquakes, droughts, and hurricanes also caused the national economy to go down. A nation may face agriculture destruction or loss in production in floods, destruction of business and infrastructure in earthquakes and may have to spend more on importing eatables in drought phases.

Natural calamities take a long time to cover up from. They may also cause a business cycle of recession or depression due to much expenditure on rehabilitation.

New Trends in Business

Due to the good and bad, rapid and new trends in the international market, a nation may face a business cycle. The era of 1990-2017 can be viewed as an example to check and analyze the advancements in the field of Mobile Phones and Information Technology. With the changing of the business market and trends users also change their lifestyle as per the modern trends.

With the arrival of new trends in business, no one can not overlook the current demand of time, they have to pay and invest in that specific new market so as to meet the needs of global economic trends. This new investment can also be the cause of depression for a national economy.

Population Expansion

The business cycle can also be seen in countries having a rapid expansion in population. Due to the increase in population, it becomes almost impossible for a government to provide the basic necessities to the citizens. When there is an immense increase in population, ultimately demand for edibles, clothes, and housing arises. Developed countries can be the example, where a majority is living; they’re below the average, unemployed or working on the lowest wages, living on roads, and have no food to eat not even the basic medical and educational facilities. In this situation, the economy has to bear a difficult time rising up again.

Weather & Climate Changes

Trade cycles can also occur due to changes in weather or climate in different parts of the world. Agricultural countries can be the victim of the business cycle due to the sudden changes in weather. If the heavy and unexpected rainy season starts in summer, ultimately it will result in low wheat production. The economy relies on agriculture which has a 70%  share in the economy.

In contrast to summer, the winter season is called the recession/ depression phase in Europe because due to the worst season businesses get a setback, laborers are affected the most, and they are fired or are offered limited jobs in that time in lieu of low wages. Supply of raw materials to businesses got late due to the odds of weather and transportation issues.

Methew Harbor

Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.