THE BUSINESS CYCLE’S CAUSES

INTERNAL CAUSES:
- Changes in demand.
+ When the demand in an economy increases the firms start producing more goods to
meet the demand. There is more output, more employment, more income, and higher
profits. This will lead to a boom in the economy. But excessive demand may also
cause inflation.
+ On the other hand, if the demand falls, so does the economic activity. This may
lead to a bust, which if it continues for a longer period of time may even lead to
depression in the economy.
- Fluctuations in Investments.
+ The investments will fluctuate on the basis of a lot of factors such as the rate of
interest in the economy, entrepreneurial interest, and profit expectation.
+ An increase in investment will lead to an increase in economic activities and cause
expansion. A decrease in investment will have the opposite effect and may cause a
trough or even depression.
- Macroeconomic Policies.
+ If the monetary policies are looking to expand economic activities by promoting
investment, then the economy booms.
+ On the other hand, if there is an increase in taxes or interest rates we will see a
slowdown or a recession in the economy.
- Supply of Money.
+ An increase of money in the market will cause growth and expansion. But too
much money supply may also cause inflation which is adverse.
+ And the decrease in the supply of money will initiate a recession in the economy.
EXTERNAL CAUSES:
- Wars.
+ The economic resources are put to use to make special goods like weapons, arms,
and other such war goods. This will lead to a fall in income, employment, and
economic activity. So the economy will face a downturn during war times.
+ And later post-war the focus will be on rebuilding. Infrastructure needs to be
reconstructed (houses, roads, bridges, etc). This will help the economy pick up again
as progress is being made. Economic activity will increase as effective demand will
increase.
- Technology Shocks.
+ New technology will mean new investment, increased employment, and
subsequently higher incomes and profits.
- Natural Factors.
+ Natural disasters like floods, droughts, hurricanes can cause damage to the crops
and huge losses to the agricultural sector. Shortage of food will cause a surge in prices
and high inflation. Capital goods may see a reduction in demand as well.
- Population Expansion.
+ Basically of the population growth is higher than the economic growth the total
savings of an economy will start dwindling. Then the investments will reduce as well
and the economy will face depression or a slow down.