What Is Business Cycle?
Business cycles are the fluctuations that occur across a country’s entire economic activities. The business cycle, like the seasons, begins anew every time. Business cycles, unlike seasons, do not have a set length of time. A business cycle phase can last a month, a year, or several years. A country’s economic activities are in constant flux; they expand and contract at the same time as a variety of economic activities take place at the same time.
In other words, business cycles are characterized by cyclical ups and downs that are primarily measured in GDP (GDP). When these fluxes last for a long time, they are caused by production, trade, employment, income, and other economic activities. For example, if employment rises, more people will have the financial means to purchase more goods, which will raise commodity demand in the economy, leading to an increase in production. This would raise a country’s GDP, indicating that the economy is booming and expanding. On the other hand, if unemployment is high, people will not have enough money to buy goods, which will reduce demand for goods in the economy, resulting in lower production. This would result in a decrease in a country’s GDP, indicating that the economy is in a slump and contracting.
In capitalist economies, business cycles, also known as economic cycles, boom-bust cycles, or trade cycles, are universal. The market determines which phase the economy is in in these economies. Understanding which stage of the economy the economy is in can help investors make financial decisions and policymakers make decisions. Because the world is rapidly globalizing, many economies can be seen to be in similar economic stages, which means economies are now more interdependent than they have ever been. NAFTA, SARRC, the Strings of Pearl, and ASEAN, to name a few, have brought nations together as economic blocs. When one economy reaches its peak, other economies that are closely linked to it are likely to follow. When one country’s economy suffers, other countries may suffer as well.
Stages/Phases Of Business Cycle
An economy goes through six distinct phases during its business cycle:
The first stage of the business cycle is expansion. Positive economic indicators such as employment, income, wages, corporate profits, demand and supply of commodities and services, among others, increase during this phase. Businesses and companies grow steadily during this phase, increasing their production and profits, the economy’s unemployment rate remains low, and the stock market performs well. During this time, consumers are more likely to spend rather than save their money. Consumers frequently buy and invest, resulting in increased demand for goods and services and, as a result, higher prices. This is the most desirable economic state for countries to achieve. This phase’s GDP has been steadily increasing over time. Furthermore, inflation is low, and the stock market is on a roll.
The next stage of the business cycle, the peak, begins when the economy reaches a saturation point in the expansion phase. When an economy is producing at maximum output, the employment rate is at or near full employment, and inflation is rising rapidly, the peak is considered the highest point of the business cycle. Economic indicators stop growing at this point because they have reached their apex. In the same way, prices are at their highest during this phase because inflation is at its highest. During this stage, the economy is thought to have grown out of control and recklessly. Companies and investors are reckless in their expansion. Companies are expanding into new markets and product lines, while investors are overconfident in their asset purchases and portfolio growth. The economy is at a low point at this point, and economic indicators have no room to grow.
The business cycle’s peak is followed by a recession. Recessions begin when the business cycle reaches its apex—when an expansion comes to an end and all economic indicators run out of room to grow. Demand for goods and services begins to decline rapidly during a recession. As a result, the cost of goods and services decreases. Due to lower prices, manufacturers are gradually reducing production. However, producers are unable to match their supply reductions with the decline in demand, resulting in excess demand in the economy. Furthermore, all positive economic indicators, such as employment, income, wages, corporate profits, demand and supply of commodities and services, and so on, begin to deteriorate.
The economy may be considered to be in a state of depression if it does not begin to expand again. The onset of this period is frequently accompanied by a drop in economic indicators. This phase is characterized by long periods of falling GDP, which is used to measure the business cycle. This is a stage of recession that is progressing. It’s a vicious cycle in which people don’t have enough money to spend, lowering demand for goods and services. People’s incomes decline as businesses fail, resulting in unemployment and a lack of money to spend. The economy’s growth continues to deteriorate as it falls below the steady growth line.
In a business cycle, the trough is the polar opposite of the peak; it is the lowest point of the economy. When depression reaches its lowest point, this stage occurs. At this point, the economy’s market begins to recover and enter an expansion phase. As deflation persists, the rate of economic growth becomes negative, and demand and supply of goods and services reach their lowest levels. After this period, the business cycle restarts and the economy begins to recover.
The economy has nowhere to go but up after the trough. The business cycle ushers the economy into a period of recovery. This is a turning point in the economy. Because of the low prices, demand for goods and services begins to rise, and as a result, producers increase their supply to meet market demand. As demand rises, businesses expand, employment rates gradually rise, and people develop a favorable attitude toward investment. This also aids in the growth of employment and production. The recovery will continue until the economy reaches a stable growth rate and enters the expansionary phase. This brings us to the end of a full business cycle.