The economy tends to be cyclical and may not remain in the same pattern for any great length of time. Business cycle models are used to express the various themes that the economy in any given region undergoes. Some of these are cycles of growth, where gross domestic product (GDP) in a country is expanding, while periods of contraction also occur when an economy may seem stagnant. Most business cycle models are identified by the economists who came up with the different theories. Business cycle models are separated by the length of time over which economic themes persist in addition to different market drivers.
American economist Joseph Kitchen contributed to the different business cycle models. His theory, which is widely referred to as the inventory cycle, unfolds over a period of up to five years. This theory focuses on the influence that inventories have on the type of GDP growth a nation experiences. According to the inventory cycle, economic demand fuels greater business production. This increase, however, results in a higher amount of inventories, and when businesses cease intense production, the slowdown has the potential to affect the economy negatively.
In another scenario, economic or business cycle models might unfold over a period of up to eleven years. This is the model touted by economist Clement Juglar from France. According to this model, businesses experience dramatic peaks and troughs along the way. The components attached to this theory describe times of prosperity followed by economic crises. Forthcoming anticipated phases include businesses falling into liquidation status where insolvency occurs, which fuels the next stage, categorized as economic recession.
During the economic boom times, when prosperity abounds, inflation is not a threat. Also, businesses tend to be highly productive and earning profits in a hand-over-fist manner. Throughout this 11-year cycle, the euphoria eventually comes to an abrupt halt as crisis sets in. In this phase, businesses are increasingly becoming insolvent and filing for bankruptcy, while the financial markets enter free-fall mode, and profits are lost. During the liquidation phase, the value of goods tends to drop, and in a recession, unemployment is likely to rise.
An infrastructure business model developed by Simon Kuznets is relevant in the real estate industry. This model ties in the development of infrastructure with various economic cycles of up to approximately two decades. Another of the business cycle models lasts for up to six decades. This theory was framed by Nikolai Kondratiev, and it attaches yearly seasons to represent the various economic cycles.
