What is the Business Cycle?
The Business Cycle refers to the vast Economic fluctuations in trade, production, and general Economic activities. The Business Cycle is also known as the boom-bust Cycle or Economic Cycle. If we look at it conceptually then, the Business Cycle refers to the up and down movements of the GDP and refers to widespread expansions and contractions in the level of Economic booming and activities.
The Business Cycle graph is never constant. Depending on the Economic standout, the rise and fall of the curve occur. The features of the Business Cycle have different phases. Business Cycles are identified into four distinct phases: Expansion, Peak, Contraction, and Trough.
What are the Features and Phases of a Business Cycle?
As mentioned earlier, there are four different phases of the Business Cycle; all these phases have different features of the Business Cycle.
Expansion: Expansion is characterized by employment increase, Economic growth, and rise in prices.
Peak: Peak is considered to be the highest point in the Business Cycle. A Business Cycle is said to have reached a peak when there is maximum output, employment is full or near to full employment, and inflationary prices are somewhat evident.
Contraction: Once the peak is reached, the Economy usually enters into the contraction phase. In this phase, the growth slows down and unemployment increases.
Trough: The contraction then hits the trough point, and it is at this time that the Economy has its bottom. Once again, the Economy will hit bottom, and the next phase of expansion and contraction will start.
What are the Features of a Business Cycle?
There are several features of a Business Cycle. Let us take a look at five features of a Business Cycle.
Occurs Periodically: The different phases of a Business Cycle occur from time to time. Although, at certain times, these periods will vary according to the Economic conditions of the industry. This duration may last as long as 10-12 years. The intensity of the phases will also change depending on the Economy. For example, at times, the firm will see massive growth followed by a short span of depression.
Synchronous: Another advantageous and prominent feature of the Business Cycle is that it is synchronic. The features of a Business Cycle are not restricted to a single firm or industry. They originate in a free Economy and are prevalent. If there is any kind of disturbance or Business boom in one industry, it will affect the other firms too. Since different kinds of industries are interrelated, the Business in one firm disturbs that in another firm.
Major Sectors are Affected: It’s been noticed that fluctuations occur not only at the level of production but also in other variables such as employment, consumption, investment, rate of interest, and price level. The investment and consumption of durable consumer goods like houses and cars are continually affected by the periodical fluctuations. As the process of consumption is deferred the courses of the Business Cycle are also affected widely.
Profit Variation: Another significant feature of the Business Cycle is that the profits fluctuate more than any other income source. This makes any kind of Business a tricky and uncertain profession for many. It is difficult to predict Economic conditions. In situations of depression, profits may even become harmful. That is why many Businesses go bankrupt.
Worldwide Impact: Business Cycles are international in nature. If depression occurs in one country, then it is bound to spread to other nations too. This happens mainly because the countries depend on each other for import and export trades. The 1930 depression in the USA and Great Britain shook the entire world and resulted in a recession.
Fun Facts About Business Cycles
Business Cycles are an aggregate phenomenon. They do not affect a single Economic activity but several Economic variables.
Expansions and recessions accompany Business Cycles.
Although Business Cycles are recurrent, they are not periodic. They often occur at regular intervals but not at a fixed duration. It is therefore tough to predict times of recession.
The expansion and contraction phases can have different durations. The amplitude of both phases doesn't need to be the same or equal.
Business Cycle Characteristics
There is no such thing as a straight line in any Economy. They all go through Cycles of Economic expansion and decline. The Economic climate is extremely dynamic, and it has a considerable impact on Business enterprises. There are some traits that all of these Business Cycles have in common. So, let's have a look at the characteristics of Business Cycles.
Cycle of Business
The Business Cycle is the natural expansion and contraction of goods and service production and output over a period of time. It can be defined as the rise and collapse of a Business in the Economy.
It is, above all, a tool for understanding the firm's and the Economy's Economic conditions. This analysis can be used by the company to make appropriate policy adjustments.
Business Cycle Phases include:
Business Cycles have various phases, which may be studied to learn more about their underlying causes. These phases have been referred to by various economists under various titles.
The Following Business Cycle Phases Have Been Identified In General:
1. Expansion is number one (Boom, Upswing or Prosperity)
2. The pinnacle (upper turning point)
3. Reduction in size (Downswing, Recession or Depression)
4. Lower turning point
In Fig. 13.1, the four phases of Business Cycles are depicted, beginning with the trough or depression, when Economic activity, i.e., production and employment, is at its lowest point.
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The Economy enters the growth phase with the revival of Economic activity, but owing to the reasons stated below, the expansion cannot last indefinitely, and after reaching its peak, contraction or downswing begins. We have depression when the contraction picks up speed.
Business Cycle Characteristics
Expansion, peak, depression, and recovery are the four stages of a Business Cycle. While each phase has its own distinct traits, there are some aspects that are shared by all stages. Take a look at these characteristics of Business Cycles.
Business Cycle Features:
1. Business Cycles occur on a regular basis. They feature identifiable phases such as expansion, peak, contraction, depression, and trough, albeit they do not show the same regularity. In addition, Cycle duration varies greatly, from a minimum of two years to a maximum of 10 to twelve years.
2. Business Cycles are also synchronised. That is, they have an all-encompassing nature and do not affect just one industry or area. Depression or contraction, for example, might occur in any industry or sector of the Economy at the same time.
3. Finally, changes have been found not only in the level of output but also in other variables such as employment, investment, consumption, interest rate, and price level.
FAQs on Understanding Business Cycles: Features and Importance
What Causes the Business Cycle?
Supply and demand forces are the primary drivers of the Business Cycle. This is accompanied by capital availability, future expectations, and GDP growth. In general, the Cycle is broken into four sections. It's also referred to as the characteristics and phases of Business Cycles. Expansion, peak, contraction, and trough are the four stages.
Any country's monetary policy affects the Economic Cycle. Changes in interest rates and money supply are made. You can read about the same in the free pdf of Features of Business Cycles from Vedantu.
What happens in the second expansion phase?
In the second expansion phase, the inflation rate is kept around 2 percent, while the banks raise the interest during the peak. Economic growth can slow down in the contraction phase, and turns negative. The trough phase is when the Economy is made to jump-start again. The proper definition, an explanation of the secondary phase in the expansion, can be checked with the help of the free PDF of the Features of Business Cycles. The monetary policy of any country changes the Economic Cycle. Interest rates and money supplies are altered.
What is an Example of a Business Cycle?
The Business Cycle since the year 2000 is the best example. The expansion process occurred from 2000 to 2007, while the recession hit from 2007 to 2009. Initially, bank loans and mortgages were easily accessible. As a result, people began purchasing homes since they could afford loans. As a result, real estate prices began to rise. The government couldn't refuse anyone because it had guaranteed money to the banks. As a result, they began to allow consumers to take out numerous mortgages on the same property. In 2007, the level of activity peaked. People started to observe a decrease in interest rates after that. Before the end of the Cycle, there was a period of Economic recession from 2007 to 2009.
What periodically occurs in the Business Cycle?
There are different phases that occur in the Business Cycle. It happens from time to time and hence is called the periodic occurrence. Although, at times, these timeframes will fluctuate depending on the industry's Economic conditions. This period could extend anywhere from 10 to 12 years. Depending on the Economy, the intensity of the phases will also differ. For example, the company may experience rapid expansion followed by a brief period of depression.
What is synchronization in the Business Cycle?
Synchronization is one of the prominent and most advantageous features of the Business Cycle. It is also called synchronic. A Business Cycle's characteristics are not unique to a single company or industry. They have their origins in a free market Economy and are used widely. If there is a disruption or a Business boom in one industry, it will influence the other Businesses as well. Different industries are intertwined, and the operations of one company can disrupt the operations of another.
