Features of Business Cycles

Every economy requires business activities for it to      flourish      and develop     . Sometimes these business activities are booming due to favorable circumstances and the economic indicators like employment, demand, investment, etc. are optimistic. But at some point in time, the business activity may not bring very good returns     and accordingly, the situation of the business in the economy becomes grim. These changing circumstances of the economy are responsible for creating business cycles.

In this article, we will look at the Features of Business cycles and try to understand how these different Features and phases of the Business cycle impact the overall economy.

Meaning of business cycle:

The business cycle refers to the cycle of expansion and contraction in the economy. The GDP (Gross Domestic Product) , which is the total value of goods and services produced in a country, keeps fluctuating from time to time. These fluctuations lead to either expansion of business (economic activity) or contraction which are termed as business cycles.

Following are the features of Business cycle economics:

1. Different timings for different phases: One of the foremost Features of Business cycles is that they don’t occur at a fixed timing. For example, the mask industry during COVID experienced an expansion in business activity. But the other industries like the tourism industry were badly impacted. Therefore ambiguity about the timings of business cycles remains a common feature of Business cycle economics.
2. Impacts the overall economy: When one industry faces expansion or depression, the overall economy gets impacted directly or indirectly. For instance, if the steel industry is suffering from depression, the impact will be seen on other  industries that use steel.
3. Impossible to predict: Due to the non-regular and non-uniform nature of business cycles it is very hard to predict.
4. Both domestic and international factors are responsible: Several factors influence business cycles. Domestic factors like government policies, domestic demand, etc. combined with international factors like treaties, pandemics, etc. play a major role in which business cycle the economy faces.

Why is the term ‘business cycle’ used?

The term ‘cycle’ is attached to business because the fluctuations in the economy move in a cyclic motion. First, you’ll see an expansion in the activity due to factors like good demand, investment, etc. It will reach a peak point after which there is no scope for further expansion and then start falling. This falling downstage is what is called a recession.

This recession,  if it continues for a long time, leads to depression in the economy  due to  the business in the economy becoming bearish. But again there is a limit to how much it will go down and this point is the trough. After the trough, the economic activity starts recovering and we enter the phase of  recovery.

Again this recovery will lead to expansion in business activity and the cycle continues. This is why we call these fluctuations ‘business cycles’.

Features and phases of the Business cycle:

Following are the different phases of the business cycle.

1. Expansion stage: Expansion is associated with a positive change in the economy. When the positive indicators in the economy like employment, investment, profits, etc. are seeing an expansion or growth, this  stage is termed as the expansion stage.
   This stage is helpful for the economy to flourish because the economy does not need to tackle negative economic indicators and the  cash flow in the economy is also positive.
2.     Peak: Peak, in general context, refers to the highest point of something. Similarly, in economics, you can associate peak with that point of the expansion stage where expansion is at its maximum level. In this phase, the positive economic indicators have reached such a point that they will not grow further. The reason can be the limited nature of resources.
3.       Recession: After the peak stage, the economic indicators start declining and the demand for the goods also reduces which leads to the onset of the recession phase. In this phase, you will see a reduction in price because of the excess supply and accordingly a reduction in productivity and wages.
4.     Depression: The next stage after the recession is depression. The economic indicators continue to fall in recession. Ultimately, the situation becomes even worse than the steady growth line. This phase is then termed depression. Unemployment in the economy increases at this stage.
5.     Trough stage: As expansion has a peak point, similarly the depression stage also has a point till where the growth can decline. This point is called the trough. The trough can be called the lowest point where the natural income depletes so much that the growth rate turns negative and the economic indicators are at their lowest point.
6.       Recovery phase: Lastly, there comes a phase, where the economy starts reviving and this phase is termed the recovery phase. The economic indicators will start growing back and the investment in the economy takes a positive turn. Factors like employment, supply, demand, etc. also see an improvement.

Conclusion:

Business cycles are integral and inevitable  for any economy. Through the Features and phases of the Business cycle, you must have understood how market forces impact the economy a lot. In the expansion stage, the economy witnesses a positive impact but it might not be long-lived due to the uncertainty of the market. As a result, the economy passes through a recession and depression phase. But change is one of the most important Features of the Business cycle. Accordingly, business activities start recovering after some time.The fluctuations continue and the government policies are designed accordingly.