Business Cycle
Overview
The business cycle, also known as the economic cycle, refers to the fluctuations in economic activity that an economy experiences over a period of time. It involves shifts between periods of relatively rapid economic growth (expansions or booms), and periods of relative stagnation or decline (contractions or recessions). These fluctuations typically involve shifts over time between periods of relatively rapid economic growth (expansions or booms) and periods of relative stagnation or decline (contractions or recessions).
Phases of the Business Cycle
The business cycle is divided into four phases: expansion, peak, contraction, and trough.
Expansion
The expansion phase is characterized by an increase in various economic factors, such as employment, industrial production, sales and personal incomes. During this phase, the economy is growing, reaching and surpassing its previous peak level of production. Businesses are producing at high capacity, unemployment is low or declining, and income levels are increasing. This generates a positive economic climate, encouraging consumers to buy more goods and services and businesses to invest more in capital goods.
Peak
The peak phase is the phase in which the economy hits a snag, having reached the maximum level of growth. At this point, economic indicators such as GDP, employment, and personal income are at their highest levels. However, because the economy cannot sustain this level of growth indefinitely, the peak phase is followed by a period of decline.
Contraction
The contraction phase is characterized by a decrease in the economic factors that were increasing during the expansion phase. This is the phase of the business cycle in which the economy is in a slowdown. Economic output is declining, with decreases in key indicators such as employment, industrial production, sales and personal incomes. Businesses are cutting back on production and may begin to lay off workers. Unemployment rises, and the flow of money through the economy slows.
Trough
The trough phase is the phase of the business cycle in which the contraction turns into expansion. This phase marks the end of the declining phase and the start of the next expansion. In the trough phase, the economy has hit bottom. Economic indicators such as GDP, employment, and personal income are at their lowest, but they are no longer declining. The economy is stabilizing and is ready to go into the next phase of expansion.
Causes of the Business Cycle
The causes of the business cycle are complex and not completely understood. However, they can generally be divided into internal and external causes.
Internal Causes
Internal causes of the business cycle include the behavior of consumers and businesses and the fiscal policies of the government. For example, if consumers become pessimistic about the economy, they may cut back on spending, leading to a decrease in business activity. Similarly, if businesses become pessimistic about the future, they may cut back on investment, leading to a decrease in business activity.
External Causes
External causes of the business cycle include changes in international economic conditions, such as changes in the global commodity prices or changes in the exchange rates, and natural disasters.
Effects of the Business Cycle
The effects of the business cycle can be seen in a variety of economic reports, including those on gross domestic product, the unemployment rate, and inflation. The effects can also be seen in the profits of corporations and in the prices of their stocks.
Measuring the Business Cycle
The business cycle is measured by the National Bureau of Economic Research in the United States. The measurement is done by looking at gross domestic product, employment, real income, and wholesale-retail sales.
Business Cycle Forecasting
Forecasting the business cycle is a complex task that involves a variety of economic factors. Economists use a variety of models to predict the phases of the business cycle. These models include leading indicators, lagging indicators, and coincident indicators.