Business Cycle Phases

Business Cycle

 

What Is A Business Cycle?

A business cycle is the natural expansion and contraction of economic growth that occurs in a country over a span of time. It is also known as an economic cycle or a trade cycle. It begins and ends with the rise and fall of a country's gross domestic product (GDP). A trade cycle can also determine the rise and fall of economic activity and stock prices.

Stages Of A Business Cycle

Business cycles might be as short as a few days or as long as a few years. The time it takes to complete all five stages of a trade cycle becomes the trade cycle's duration. The five stages of a trade cycle are as follows:

1. Expansion

The expansion stage is always the first stage of a trade cycle. There may be positive economic indicators at this stage, including income, employment, demand, supply and profit growth. The frequency of investments increases as a company grows, and both corporations and individuals repay their loans on time.

2. Peak

The trade cycle reaches its peak when the economy becomes saturated and upward expansion can no longer persist. Wages, employment rates and the cost of products and services have reached their maximum levels at this stage. These economic indicators can reach a point where they may not increase further. In anticipation of a drop in economic activity, many businesses and people can review their budgets at this stage.

3. Contraction

Economic growth patterns may reverse as the economy contracts at the end of the peak stage. There are two separate stages of contraction:

Recession

When the expansion phase of the economy finishes and economic activity falls, the recession stage begins. It lasts until the GDP reaches the starting point of the expansion stage. Demand may ‌fall almost immediately during a recession, but producers may not adjust their output until the market supply is high. At this moment, positive economic factors like prices and salaries may collapse.

Depression

When GDP falls below the pre-expansion level or the steady growth line, the depression stage begins. Unemployment rates may skyrocket during a depression, while economic development slows down frequently. A depression lasts until the economy can no longer fall any lower.

4. Trough

A trade cycle enters the trough stage when the depression stage reaches its lowest point. The country may experience negative economic growth during this time. Supply and demand may become as low as possible.

5. Recovery

The recovery stage begins when the economy's GDP reaches its lowest point in the cycle. The economy may ‌rebound and reverse unfavourable trends at this point. When demand rises, so does supply. Investments may eventually resume, and employment and output can ‌increase. The recovery period lasts until the economy's growth rate recovers to a more consistent level. The current trade cycle ends as it reaches this point, and a new one begins as it enters the expansion stage.