BUSINESS CYCLES AND PROFITS Introduction This

Cyclical movements in the level of economic activity are recognized in economic theory (Ekelund and Hebert 413425). Significant effort is put into the measurement of business cycles, and into the development of indicators of change for such cyclical activity (Beckman and Tapscott 2428). Such measurement and indicator development provide data as to what and when, while failing to answer the underlying question of why. Although a great body of theoretical literature has evolved with respect to cyclical economic movement, no single theory or combination of theories has satisfactorily explained all such phenomena.The term business cycle is the name given to relatively shortterm fluctuations in the general level of economic activity, as measured by macroeconomic variables, such as changes in real gross national product or real gross domestic product (Gwartney, Stroup, and Studenmund 138). As early as 1819, Jean Sismondi, a Swiss economist, recognized and systematically investigated such shortrun economic fluctuations.

The first widely accepted working definition of the business cycle was formulated at the National Bureau of Economic Research (NBER) by Wes

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o increase modestly during the expansion phase of a business cycle and to increase substantially during the boom phase of a cycle. Again in theory, one would expect profit margins to begin to decrease modestly during the contraction phase of a business cycle, and one would expect substantial decreases in profit margins, perhaps even to observe costs exceeding revenues, during the recessionary phase of a cycle. In quite general terms, the patterns described above do occur in business cycles; however, the intensity of each action tends to vary greatly across business cycles. The actual relationships between profit margins and completed business cycles during the 40year 19541993 period were as follows: 1. The expansion phase of the first complete business cycle subsequent to the end of the Korean War began in latesummer 1954 and lasted for six months (Heilbronner and Thurow 327). This business cycle was characterized by a 24 month boom phase, which was attributed to a capital goods boom in the American economy. The ensuing contraction lasted for almost a year. Over the three growth phases of this business cycle which together spanned 37 months, profit margins increased by 53.6 percent. The rate of profit growth during the
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Approximate Word count = 2119
Approximate Pages = 8 (250 words per page)