Saturday, April 26, 2014

CLIMATIC THEORY OF BUSINESS CYCLE

The climatic theory is one of the oldest theories of business cycles. William Stanley Jevons mainly developed this theory based on the ideas of Sir William Herschel. He linked the trade cycles to the ‘sun-spots’

 According to this theory the life of a business cycle is 10 to 11 years in sunspot activity influencing the climate and harvest. Bad climate causes crop failures and gives initial push to depression that spreads over to interdependent sectors of the economy.
A good climate results in bumper crops and gives rise to expansion. The theory pointed out that the variations in the rainfall were so regular that periods of bad harvests often alternated with periods of good harvests. Thus, a period of depression was often followed by a period of boom.

The climatic theory has been criticized on the following grounds:

1 .It is widely accepted that the prospects of agriculture affect the prospects of industries. However, it is difficult to correlate business cycles with climatic cycles. Climatic influences may be one of the factors influencing the course of the trade but the business cycles may not be solely attributed to them. Moreover, climatic influences cannot explain the reasons for the increase in the production of capital goods more during booms than during depressions.

2. Prof. Clark argues that agriculture is not a regularly acting force, tending typically and regularly to help initiate recovery, or stimulate the revival, or in any other way to play habitually the same role in at least a predominant number of cycles. This implies that as countries become more industrialized the share of agriculture in the total national income get reduced. Further, the government policy of fixing minimum prices of agricultural products prevents agricultural prices to fall below the minimum in the situation of over-production.

The climatic theory does not explain the various phases of a trade cycle.
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