Stages of Business Cycle

WHAT IS A BUSINESS CYCLE ?

The business cycle or an economic cycle describes the rise and fall in the production output of goods and services in an economy. It demonstrates the fiscal activity of an economy over a period of time.

The good phases of a business cycle show growth and expansion of the economy along with rising GDPs whereas the negative phases of business cycle show rising unemployment levels, low GDP, rising prices etc.

These phases are cyclic in nature and occur periodically in every economy.

BUSINESS CYCLE STAGES

There are 4 phases in every Business cycle , namely, Expansion, Peak, Contraction and Trough. These are explained as below-

EXPANSION : The expansion phase of the business cycle, also known as an economic recovery, is the period when business activity flourishes and GDP grows or expands until it reaches a peak

It is characterized by increasing employment, economic growth, and upward pressure on prices. There is also an increase in the demand in the market, capital expenditure, sales and subsequently an increase in income and profits & the production level is on maximum capacity.

PEAK : A market peak is the highest point between the end of an economic expansion and the start of a contraction in a business cycle. An economy’s gross domestic product, or GDP, is normally high during a cycle’s expansion and peak, which indicates that the economy is operating efficiently.

The growth of the economy stabilizes at the peak for a short period. Then it goes in the reverse direction.

CONTRACTION : Following a peak, the economy typically enters into a correction which is characterized by slow growth, declining employment and rising prices.  This phase is the complete opposite of the expansion phase.

Also known as economic recession, this stage generally occurs as a result of rising interest rates when economic growth slows but is not necessarily negative.

TROUGH : A business cycle’s trough occurs in the final month of its contraction phase and is recognized only after it is over. This stage is the complete opposite of the Peak phase. . During the trough period, the GDP rate and employment rate reach their lowest levels in the business cycle.

This stage indicates that the economy has hit a bottom from which the next phase of expansion and contraction will emerge.

 

Thus, in simple words a business cycle is the natural rise and fall of economic growth that occurs over time and serves as a useful tool for analyzing the economy & making better financial decisions.

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