Business cycle models describe the cyclical nature of the economy, with different economists proposing various theories. Joseph Kitchen’s inventory cycle theory focuses on the impact of inventories on GDP growth, while Clement Juglar’s model describes periods of prosperity followed by economic crises. Simon Kuznets’ infrastructure model is relevant to real estate, and Nikolai Kondratiev’s theory attaches annual seasons to represent different economic cycles.
The economy tends to be cyclical and may not stay in the same pattern for a long time. Business cycle models are used to express the various issues that the economy in a particular region experiences. Some of these are cycles of growth, where the gross domestic product (GDP) in a country is expanding, while also experiencing periods of contraction where an economy may seem stagnant. Most of the business cycle models are identified by economists who have come up with different theories. The business cycle models are separated by the time period during which economic themes persist as well as different market drivers.
American economist Joseph Kitchen has contributed to the different models of the business cycle. The theory of him, broadly referred to as the inventory cycle, runs over a period of up to five years. This theory focuses on the influence inventories have on the type of GDP growth a nation experiences. According to the inventory cycle, economic demand fuels higher corporate output. This increase, however, translates into more inventories, and when companies cease intense production, the slowdown has the potential to negatively affect the economy.
In another scenario, business or business cycle patterns could unfold over a period of up to eleven years. This is the model advertised by economist Clement Juglar from France. According to this model, companies experience dramatic peaks and troughs along the way. The components attached to this theory describe periods of prosperity followed by economic crises. Expected next stages include businesses falling into liquidation where insolvency occurs, which feeds into the next stage, classified as an economic downturn.
During boom times, when prosperity abounds, inflation is not a threat. Additionally, companies tend to be highly productive and earn profits in a fistful of ways. During this 11-year cycle, the euphoria eventually ends abruptly as the crisis sets in. At this stage, companies are becoming increasingly insolvent and filing for bankruptcy, while financial markets go into free-fall mode and profits are lost. During the liquidation phase, the value of assets tends to fall and in a recession unemployment is likely to rise.
An infrastructure business model developed by Simon Kuznets is relevant in the real estate sector. This pattern relates to infrastructure development with various economic cycles up to about two decades. Another of the business cycle models lasts up to six decades. This theory was framed by Nikolai Kondratiev and attaches annual seasons to represent various economic cycles.
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