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Business Cycle

The business cycle refers to the fluctuations in GDP around its long-term growth rate, encompassing stages of expansion, peak, recession, depression, trough, and recovery. Each stage reflects changes in economic indicators such as employment, income, and production, with a complete cycle marked by a boom followed by a contraction. The cycle concludes when the economy returns to steady growth levels after recovery from a trough.

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15 views11 pages

Business Cycle

The business cycle refers to the fluctuations in GDP around its long-term growth rate, encompassing stages of expansion, peak, recession, depression, trough, and recovery. Each stage reflects changes in economic indicators such as employment, income, and production, with a complete cycle marked by a boom followed by a contraction. The cycle concludes when the economy returns to steady growth levels after recovery from a trough.

Uploaded by

shivam singh
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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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
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 , the straight line in the middle


is the steady growth line. The business cycle
moves about the line. Now let us see a more
detailed description of each stage in the
business cycle:
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.
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.
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.
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.
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.
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.

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