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Business Cycle

A business cycle consists of periods of economic growth (expansion and peak) followed by periods of decline or contraction (recession, depression, and trough) and then back to growth again. It can be measured by looking at changes in factors like employment, income, output, and demand over time. The cycle includes six stages: expansion, peak, recession, depression, trough, and recovery. It is completed when the economy goes through one full period of growth and decline.

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81 views2 pages

Business Cycle

A business cycle consists of periods of economic growth (expansion and peak) followed by periods of decline or contraction (recession, depression, and trough) and then back to growth again. It can be measured by looking at changes in factors like employment, income, output, and demand over time. The cycle includes six stages: expansion, peak, recession, depression, trough, and recovery. It is completed when the economy goes through one full period of growth and decline.

Uploaded by

seul Gi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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What is a Business Cycle?

A business cycle is a cycle of fluctuations in the Gross Domestic Product (GDP) around its long-term
natural growth rate. It explains the expansion and contraction in economic activity that an economy
experiences over time.

A business cycle is completed when it goes through a single boom and a single contraction in sequence.
The time period to complete this sequence is called the length of the business cycle. A boom is
characterized by a period of rapid economic growth whereas a period of relatively stagnated economic
growth is a recession. These are measured in terms of the growth of the real GDP, which is inflation-
adjusted.

Stages of the Business Cycle

In the diagram above, the straight line in the middle is the steady growth line. The business cycle moves
about the line. Below is a more detailed description of each stage in the business cycle:

1. Expansion

The first stage in the business cycle is expansion. In this stage, there is an increase in positive economic
indicators such as employment, income, output, wages, profits, demand, and supply of goods and
services. Debtors are generally paying their debts on time, the velocity of the money supply is high, and
investment is high. This process continues as long as economic conditions are favorable for expansion.

2. Peak

The economy then reaches a saturation point, or peak, which is the second stage of the business cycle.
The maximum limit of growth is attained. The economic indicators do not grow further and are at their
highest. Prices are at their peak. This stage marks the reversal point in the trend of economic growth.
Consumers tend to restructure their budgets at this point.

3. Recession

The recession is the stage that follows the peak phase. The demand for goods and services starts
declining rapidly and steadily in this phase. Producers do not notice the decrease in demand instantly and
go on producing, which creates a situation of excess supply in the market. Prices tend to fall. All positive
economic indicators such as income, output, wages, etc., consequently start to fall.

4. Depression

There is a commensurate rise in unemployment. The growth in the economy continues to decline, and as
this falls below the steady growth line, the stage is called a depression.

5. Trough

In the depression stage, the economy’s growth rate becomes negative. There is further decline until the
prices of factors, as well as the demand and supply of goods and services, contract to reach their lowest
point. The economy eventually reaches the trough. It is the negative saturation point for an economy.
There is extensive depletion of national income and expenditure.

6. Recovery

After the trough, the economy moves to the stage of recovery. In this phase, there is a turnaround in the
economy, and it begins to recover from the negative growth rate. Demand starts to pick up due to low
prices and, consequently, supply begins to increase. The population develops a positive attitude towards
investment and employment and production starts increasing.

Employment begins to rise and, due to accumulated cash balances with the bankers, lending also shows
positive signals. In this phase, depreciated capital is replaced, leading to new investments in the
production process. Recovery continues until the economy returns to steady growth levels.

This completes one full business cycle of boom and contraction. The extreme points are the peak and the
trough.

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