What is Business Cycle?

Follow us on LinkedIn A nation’s economy is its state in terms of production and consumption of goods and services. It also includes other factors, such as the supply of money. Based on these factors, a country’s economy may undergo several fluctuations over a period of time. Usually, there are various stages that an economy goes through. These stages come under the business cycle.

What is a Business Cycle?

The term business cycle represents a cycle of fluctuations in a nation’s gross domestic product (GDP) over a period of time. It shows a country’s growth or demise in economic terms over some time. Therefore, it can be critical in analyzing the country’s economy. It considers a country’s natural growth rate over a long period of time. The business cycle explains any fluctuations in a country’s economic activity over time. The business cycle has several stages that each nation goes through. Based on some indicators, it is possible to identify a country’s current stage in the business cycle. Therefore, it can also help make better financial decisions. Some other names used to describe the business cycle are the economic cycle or trade cycle.

How does Business Cycle work?

A single business cycle may expand over several years for an economy. During this period, the nation’s economy will experience a boom and a contraction in sequence. There are also two other stages involved in the business cycle. These include the peak stage and the trough stage. However, these can be generalized as expansion and contraction as well. A business cycle starts with an expansion and reaches its peak stage. At that point, it will experience a recession, which is a downward movement towards a contraction. The economy then suffers a depression, finally leading to the trough stage. At this point, the economy recovers and moves towards expansion. This cycle continues in the same sequence.

What are the stages of a Business Cycle?

A business cycle consists of four stages. These include the expansion, peak, contraction, and trough stages. Each of these stages has some characteristics that can indicate the country’s current position along the business cycle.

Expansion

The expansion stage of the business cycle features an increase in economic indicators. During this period, a country’s GDP grows due to a rise in income, demand, supply, wages, employment, etc. There are optimal points that each factor reaches, such as inflation nearing 2%. Economic expansions can last for a long time if the conditions are favourable.

Peak

The peak stage is when an economy is at its highest point. It is the second stage of the business cycle after expansion. At this stage, a country’s economy has reached its ceiling for growth. Usually, there is no further or only limited growth. The peak stage is the transitional period between expansion and contraction.

Contraction

The third phase in the business cycle is the contraction period. During this period, a country’s economy weakens, and economic activity decreases. All the above factors, such as employment, demand, supply, income, etc., also decline. The contraction period then leads to the trough stage in the business cycle.

Trough

Like the peak, the trough stage in the business cycle is when the contraction is highest. Usually, a country’s GDP will become negative at the trough. However, there is limited or no decline in economic activity. At this stage, the decline is at its peak. After the trough period, the economy usually recovers and enters into an expansion.

Conclusion

The business cycle is a cycle of expansions and contractions in a country’s economy. It explains the fluctuations in economic activity for a country over a period of time. There are several stages in the business cycle, each of which has specific characteristics. These stages include expansion, peak, contraction, and trough.

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