A series of expansion and contraction in economic activity
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What is a Business Cycle?
A business cycle is a cycle of fluctuations in the Gross Domestic Product (GDP) around its long-term natural growth rate. It explains the expansion and contraction in economic activity that an economy experiences over time.
A business cycle is completed when it goes through a single boom and a single contraction in sequence. The time period to complete this sequence is called the length of the business cycle.
A boom is characterized by a period of rapid economic growth, whereas a period of relatively stagnated economic growth is a recession. These are measured in terms of the growth of the real GDP, which is inflation-adjusted.
Stagesof the Business Cycle
In the diagram above, the straight line in the middle is the steady growth line. The business cycle moves about the line. Below is a more detailed description of each stage in the business cycle:
1. Expansion
The first stage in the business cycle is expansion. In this stage, there is an increase in positive economic indicators such as employment, income, output, wages, profits, demand, and supply of goods and services. Debtors are generally paying their debts on time, the velocity of the money supply is high, and investment is high. This process continues as long as economic conditions are favorable for expansion.
2. Peak
The economy then reaches a saturation point, or peak, which is the second stage of the business cycle. The maximum limit of growth is attained. The economic indicators do not grow further and are at their highest. Prices are at their peak. This stage marks the reversal point in the trend of economic growth. Consumers tend to restructure their budgets at this point.
3. Recession
The recession is the stage that follows the peak phase. The demand for goods and services starts declining rapidly and steadily in this phase. Producers do not notice the decrease in demand instantly and go on producing, which creates a situation of excess supply in the market. Prices tend to fall. All positive economic indicators such as income, output, wages, etc., consequently start to fall.
4. Depression
There is a commensurate rise in unemployment. The growth in the economy continues to decline, and as this falls below the steady growth line, the stage is called a depression.
5. Trough
In the depression stage, the economy’s growth rate becomes negative. There is further decline until the prices of factors, as well as the demand and supply of goods and services, contract to reach their lowest point. The economy eventually reaches the trough. It is the negative saturation point for an economy. There is extensive depletion of national income and expenditure.
6. Recovery
After the trough, the economy moves to the stage of recovery. In this phase, there is a turnaround in the economy, and it begins to recover from the negative growth rate. Demand starts to pick up due to low prices and, consequently, supply begins to increase. The population develops a positive attitude towards investment and employment and production starts increasing.
Employment begins to rise and, due to accumulated cash balances with the bankers, lending also shows positive signals. In this phase, depreciated capital is replaced, leading to new investments in the production process. Recovery continues until the economy returns to steady growth levels.
This completes one full business cycle of boom and contraction. The extreme points are the peak and the trough.
Explanations by Economists
John Keynes explains the occurrence of business cycles is a result of fluctuations in aggregate demand, which bring the economy to short-term equilibriums that are different from a full-employment equilibrium.
Keynesian models do not necessarily indicate periodic business cycles but imply cyclical responses to shocks via multipliers. The extent of these fluctuations depends on the levels of investment, for that determines the level of aggregate output.
In contrast, economists like Finn E. Kydland and Edward C. Prescott, who are associated with the Chicago School of Economics, challenge the Keynesian theories. They consider the fluctuations in the growth of an economy not to be a result of monetary shocks, but a result of technology shocks, such as innovation.
Additional Resources
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FAQs
Business cycles are composed of concerted cyclical upswings and downswings in the broad measures of economic activity—output, employment, income, and sales. The alternating phases of the business cycle are expansions and contractions.
What are the 4 phases of the business cycle? ›
An economic cycle, or business cycle, has four stages: expansion, peak, contraction, and trough. The average economic cycle in the U.S. has lasted roughly five and a half years since 1950, although these cycles can vary in length.
Are there 4 types in business cycle? ›
The business cycle refers to the increases and decreases in economic activity caused by factors like interest rates, trade, production costs and investments. The four fundamental stages of the business cycle are expansion, peak, contraction and trough.
What are the 4 phases of the trade cycle? ›
According to Prof. Schumpeter, a trade cycle can have 4 phases : (1) Expansion or Boom, (2) Recession, (3) Depression or Trough or Contraction, and (4) Recovery. This phase of the business cycle represents the best stage of prosperity.
What business cycle are we in now? ›
Stage IV. There is almost no doubt, that we are now in Stage IV of the Business Cycle, as defined by the great cycle guru, Martin Pring.
What are the 4 stages of the business life cycle? ›
These stages are Launch, Growth, Maturity and Decline/Renewal. The stages are not unique to one type of business; all businesses go through them, so let's look at what they mean.
What is phase 4 in business? ›
Stage 4: Business Renewal or Decline
This can happen for a variety of reasons, such as: Not pursuing opportunities to expand during the maturity stage. Changes to the industry affecting customer demand. Competing businesses having better products or services. Not reacting to technology updates or advances.
What are the 4 seasons of the business cycle? ›
Although there are numerous theories explaining what causes economic cycles, most generally agree on the four phases: expansion, peak, contraction, and recovery.
What are the 7 cycles of business? ›
The Seven Stages of Business Life
- Seed Stage. The seed stage of your business life cycle is when your business is just a thought or an idea. ...
- Start-Up Stage. Your business is born and now exists legally. ...
- Growth Stage. ...
- Established Stage. ...
- Expansion Stage. ...
- Decline Stage. ...
- Exit Stage.
What is the Business Life Cycle? The business life cycle is the progression of a business in phases over time and is most commonly divided into five stages: launch, growth, shake-out, maturity, and decline.
Learn to identify the four stages of a stock market cycle: accumulation, markup, distribution, and markdown. From the changing seasons to the ebb and flow of the economy, cycles are all around us.
What are the 4 phases of the change cycle? ›
The stages are shock, anger, acceptance and commitment. People's initial reaction to the change will likely be shock or denial as they refuse to accept that change is happening.
What are the four stages of the order cycle? ›
There are four main stages in an order cycle: taking the order, processing the order, shipping the order, and delivering the order. Each stage can involve different steps and take different amounts of time. Taking the Order: The first step in an order cycle is taking the customer's order.
What is the 4 business cycle? ›
In general, the business cycle consists of four distinct phases: expansion, peak, contraction, and trough.
What is the best indicator of a recession? ›
The best available recession indicator, known as the “Sahm Rule,” holds that when the unemployment rate rises to at least half a percentage point above its low point in the past year, a recession has begun. Today, this indicator is flashing a warning sign for the United States.
How long is a business cycle? ›
Typically their periodicity has a wide range from around 2 to 10 years. There are numerous sources of business cycle movements such as rapid and significant changes in the price of oil or variation in consumer sentiment that affects overall spending in the macroeconomy and thus investment and firms' profits.
What are the four phases of the business cycle in Quizlet? ›
The four phases of the business cycle are peak, recession, trough, and expansion.
What are the phases of the business process? ›
The six phases of business process management, as identified in Villanova's Essentials of BPM course, are Assess, Design, Model, Implement, Monitor and Modify.
What are the four stages in the life cycle of a business ecosystem? ›
There are generally four stages in a business lifecycle: establishment, growth and expansion, maturity, and decline. Each stage of the business ownership lifecycle brings with it unique challenges that can only be faced through adequate planning.
What are the stages of the market cycle? ›
Every market cycle includes four stages: accumulation, markup, distribution, and markdown. If you've ever heard people use terms like “bubble burst”, “crash”, or even “recovery”, what they're referring to are various stages of the market cycle.
