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    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

    Business Cycle

    A series of expansion and contraction in economic activity

    Written by CFI Team

    Updated November 24, 2022

    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.

    Stages of 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

    Thank you for reading CFI’s guide to Business Cycle. To learn more, check out these additional CFI resources:

    Free Economics for Capital Markets Course

    Law of Supply Normative Economics

    Cyclical Unemployment

    Inelastic Demand

    See all economics resources

    स्रोत : corporatefinanceinstitute.com

    5 Phases of a Business Cycle (With Diagram)

    ADVERTISEMENTS: Business cycles are characterized by boom in one period and collapse in the subsequent period in the economic activities of a country. These fluctuations in the economic activities are termed as phases of business cycles. The fluctuations are compared with ebb and flow. The upward and downward fluctuations in the cumulative economic magnitudes of […]

    5 Phases of a Business Cycle (With Diagram)

    Article Shared by ADVERTISEMENTS:

    Business cycles are characterized by boom in one period and collapse in the subsequent period in the economic activities of a country.

    These fluctuations in the economic activities are termed as phases of business cycles.

    The fluctuations are compared with ebb and flow. The upward and downward fluctuations in the cumulative economic magnitudes of a country show variations in different economic activities in terms of production, investment, employment, credits, prices, and wages. Such changes represent different phases of business cycles.

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    The different phases of business cycles are shown in Figure-1:

    There are basically two important phases in a business cycle that are prosperity and depression. The other phases that are expansion, peak, trough and recovery are intermediary phases.

    Figure-2 shows the graphical representation of different phases of a business cycle:

    As shown in Figure-2, the steady growth line represents the growth of economy when there are no business cycles. On the other hand, the line of cycle shows the business cycles that move up and down the steady growth line. The different phases of a business cycle (as shown in Figure-2) are explained below.

    1. Expansion:

    The line of cycle that moves above the steady growth line represents the expansion phase of a business cycle. In the expansion phase, there is an increase in various economic factors, such as production, employment, output, wages, profits, demand and supply of products, and sales.

    In addition, in the expansion phase, the prices of factor of production and output increases simultaneously. In this phase, debtors are generally in good financial condition to repay their debts; therefore, creditors lend money at higher interest rates. This leads to an increase in the flow of money.

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    In expansion phase, due to increase in investment opportunities, idle funds of organizations or individuals are utilized for various investment purposes. Therefore, in such a case, the cash inflow and outflow of businesses are equal. This expansion continues till the economic conditions are favorable.

    2. Peak:

    The growth in the expansion phase eventually slows down and reaches to its peak. This phase is known as peak phase. In other words, peak phase refers to the phase in which the increase in growth rate of business cycle achieves its maximum limit. In peak phase, the economic factors, such as production, profit, sales, and employment, are higher, but do not increase further. In peak phase, there is a gradual decrease in the demand of various products due to increase in the prices of input.

    The increase in the prices of input leads to an increase in the prices of final products, while the income of individuals remains constant. This also leads consumers to restructure their monthly budget. As a result, the demand for products, such as jewellery, homes, automobiles, refrigerators and other durables, starts falling.

    3. Recession:

    As discussed earlier, in peak phase, there is a gradual decrease in the demand of various products due to increase in the prices of input. When the decline in the demand of products becomes rapid and steady, the recession phase takes place.

    In recession phase, all the economic factors, such as production, prices, saving and investment, starts decreasing. Generally, producers are unaware of decrease in the demand of products and they continue to produce goods and services. In such a case, the supply of products exceeds the demand.

    Over the time, producers realize the surplus of supply when the cost of manufacturing of a product is more than profit generated. This condition firstly experienced by few industries and slowly spread to all industries.

    This situation is firstly considered as a small fluctuation in the market, but as the problem exists for a longer duration, producers start noticing it. Consequently, producers avoid any type of further investment in factor of production, such as labor, machinery, and furniture. This leads to the reduction in the prices of factor, which results in the decline of demand of inputs as well as output.

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    4. Trough:

    During the trough phase, the economic activities of a country decline below the normal level. In this phase, the growth rate of an economy becomes negative. In addition, in trough phase, there is a rapid decline in national income and expenditure.

    In this phase, it becomes difficult for debtors to pay off their debts. As a result, the rate of interest decreases; therefore, banks do not prefer to lend money. Consequently, banks face the situation of increase in their cash balances.

    Apart from this, the level of economic output of a country becomes low and unemployment becomes high. In addition, in trough phase, investors do not invest in stock markets. In trough phase, many weak organizations leave industries or rather dissolve. At this point, an economy reaches to the lowest level of shrinking.

    स्रोत : www.economicsdiscussion.net

    Business Cycle: What It Is, How to Measure It, the 4 Phases

    The business cycle depicts the increase and decrease in production output of goods and services in an economy.

    ECONOMY ECONOMICS

    Business Cycle: What It Is, How to Measure It, the 4 Phases

    By LAKSHMAN ACHUTHAN Updated June 15, 2022

    Reviewed by PETER WESTFALL

    Fact checked by KIRSTEN ROHRS SCHMITT

    Madelyn Goodnight / Investopedia

    What Is a Business Cycle?

    Business cycles are a type of fluctuation found in the aggregate economic activity of a nation -- a cycle that consists of expansions occurring at about the same time in many economic activities, followed by similarly general contractions (recessions). This sequence of changes is recurrent but not periodic.

    The business cycle is an example of an economic cycle.

    KEY TAKEAWAYS

    Business cycles are comprised 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 (also called recessions).

    Recessions often start at the peak of the business cycle—when an expansion ends—and end at the trough of the business cycle, when the next expansion begins.

    The severity of a recession is measured by the three D’s: depth, diffusion, and duration, and the strength of an expansion by how pronounced, pervasive, and persistent it is.

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    Business Cycle

    Understanding the Business Cycle

    In essence, business cycles are marked by the alternation of the phases of expansion and contraction in aggregate economic activity, and the comovement among economic variables in each phase of the cycle. Aggregate economic activity is represented by not only real (i.e., inflation-adjusted) GDP—a measure of aggregate output—but also the aggregate measures of industrial production, employment, income, and sales, which are the key coincident economic indicators used for the official determination of U.S. business cycle peak and trough dates.

    A popular misconception is that a recession is defined simply as two consecutive quarters of decline in real GDP. Notably, the 1960–61 and 2001 recessions did not include two successive quarterly declines in real GDP.

    1

    A recession is actually a specific sort of vicious cycle, with cascading declines in output, employment, income, and sales that feed back into a further drop in output, spreading rapidly from industry to industry and region to region. This domino effect is key to the diffusion of recessionary weakness across the economy, driving the comovement among these coincident economic indicators and the persistence of the recession.

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    On the flip side, a business cycle recovery begins when that recessionary vicious cycle reverses and becomes a virtuous cycle, with rising output triggering job gains, rising incomes, and increasing sales that feed back into a further rise in output. The recovery can persist and result in a sustained economic expansion only if it becomes self-feeding, which is ensured by this domino effect driving the diffusion of the revival across the economy.

    Of course, the stock market is not the economy. Therefore, the business cycle should not be confused with market cycles, which are measured using broad stock price indices.

    Measuring and Dating Business Cycles

    The severity of a recession is measured by the three D's: depth, diffusion, and duration. A recession's depth is determined by the magnitude of the peak-to-trough decline in the broad measures of output, employment, income, and sales. Its diffusion is measured by the extent of its spread across economic activities, industries, and geographical regions. Its duration is determined by the time interval between the peak and the trough.

    2

    In analogous fashion, the strength of an expansion is determined by how pronounced, pervasive, and persistent it turns out to be. These three P's correspond to the three D's of recession.

    An expansion begins at the trough (or bottom) of a business cycle and continues until the next peak, while a recession starts at that peak and continues until the following trough.

    The National Bureau of Economic Research (NBER) determines the business cycle chronology—the start and end dates of recessions and expansions for the United States. Accordingly, its Business Cycle Dating Committee considers a recession to be "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

    3

    The Dating Committee typically determines recession start and end dates long after the fact. For instance, after the end of the 2007–09 recession, it "waited to make its decision until revisions in the National Income and Product Accounts [were] released on July 30 and Aug. 27, 2010," and announced the June 2009 recession end date on Sept. 20, 2010.

    स्रोत : www.investopedia.com

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