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.
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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.
1. What Causes the Business Cycle?
Ans: The business cycle is mainly caused by supply and demand forces. This is accompanied by the availability of capital, future expectations and GDP. The cycle is generally divided into four segments. It is also known as the features and phases of business cycles. They are expansion, peak, contraction, and trough.
The monetary policy of any nation changes the economic cycle. Interest rates and money supplies are altered. In the expansion phase, the inflation rate is kept around 2 percent, while the banks raise the interest during the peak. In the contraction phase, economic growth slows and turns negative. It is the trough phase that the economy is made to jump-start once again.
2. What is an Example of a Business Cycle?
Answer: The business cycle since the year 2000 is a great example. The expansion process occurred from 2000 to 20007, while the recession hit from 2007 to 2009. Initially, there was easy access to bank loans and mortgages. Hence, people started buying homes as they could afford loans. Thus, real estate prices started to increase.
Since the government had promised money to the banks, they couldn't say no to anyone. As a result, they started allowing people to take multiple mortgages on a single house. The peak of the activity reached in 2007. It is from then that people started to notice a fall in the interest rates. The economic contraction occurred from 2007-2009 before completion of the entire cycle.