Business Cycles

Business Cycle is a regularly occurring change in the economy of a country while the economy contracts and expands. It occurs in a continuous pattern and is therefore measured by the rising and falling GDP (Gross Domestic Product) of the respective nation. The business cycle is also known as the “trade cycle”. The business cycle’s meaning is therefore crucial for all country’s economies. 

Causes and benefits of a business cycle

Every country has a business cycle. This is so because it is natural for every capitalistic nation to experience growths and declines in their GDP. Due to the process of globalization, countries across the whole world can experience similar trends in business cycles, unlike the times when globalization was limited. Determination of the business cycle can result in being helpful for investors and the government. The business cycle will help investors make significant decisions regarding their investments and it helps the government to acknowledge the key economic problems and endorse an appropriate policy for the country.

Stages of a business cycle

There are different business cycle types, yet all of them follow the same stages of function. There are four different stages in a business cycle through which the GDP of a country can go through. Following are the stages of a business cycle – 

Expansion- Expansion is such a stage where the conditions seem to be normal and it is the most desirable stage for a nation. The stage of expansion depicts a positive period for the GDP of the country. When the GDP of a country is in the stage of expansion, it tells that the businesses and the various companies present in the country who are contributing to the GDP are growing steadily while expanding their production and maximizing profits. The rate of unemployment remains low and the condition of the market is on the positive side. Consumers in the market are regularly buying and also investing. The demand for products increases at a decent rate and the price of products continues to increase at a steady rate. 

Peak- When the economy of a country starts to expand uncontrollably, it is known as the peak. When the economy reaches the peak stage of a business cycle, it tells that the growth of the economy of the country is reckless. While a country is in its peak stage, investors start to grow overconfident and invest more. They buy assets and then increase the price significantly. Everything in the country starts to cost more than before. The peak stage can be referred to as an alarming stage because once a country’s economy reaches its peak; there is no possibility of more expansion. The production and the prices of goods cannot be increased any further and therefore it means that the economy can only go down shortly.

Contraction- Contraction is the stage between peak and trough. After an economy hits the peak stage, they enter the stage of contraction. Economic activities in the country start to decrease. When the economy is going through the contraction stage, unemployment rates start to increase and the market turns into a bear market. The GDP of the country decreases lower than 2% which depicts the reduction in business activities with the economic premises of the country.

If the GDP of a country continues to decline for two consecutive years, it enters the stage of recession. In this stage, the GDP of the country starts to go down.

Trough- Trough is the stage where the GDP of a country goes down as much as possible and then starts to recover. After this stage, the GDP starts to expand again, and thus the business cycle continues.

How long does a business cycle last?

There is no specific time limit for a business cycle. Sometimes a business cycle can last for only a month whereas sometimes it can continue for several years. Usually, the stage of expansion is much longer than the stage of contraction. However, there are some exceptional cases where the opposite happened. Thus, the period of each stage may vary.

Conclusion

The business cycle plays an important role in the determination of the economic conditions of a country. A business cycle is never-ending because it is a continuous process. As long as an economy of a country exists, the business cycle of that country will also exist. By supervising the business cycle of a country, the government can take necessary measurements that may aid in expansion and reduction in fluctuations. Similarly various other individuals like investors and multinational companies. The National Bureau of Economic Research declares the economic state of a country by supervising the business cycle of the country’s economy. Therefore, a business cycle is very important for the betterment of the country and its people.