phases of the business cycle

What are the phases of the business cycle?

As an economy grows and shrinks, it helps to explain the growth and contraction in economic activity that it undergoes throughout time. An economy has completed a business cycle when it has gone through a single expansion followed by a single recession in succession. The duration of the business cycle or phases of business cycle is the amount of time it takes to complete this series of events.

An indicator that is updated monthly and moves in tandem with the economy:

From 1945 to 1991, the National Bureau of Economic Research (NBER) identified nine economic cycles throughout that period. During this period, the typical economic cycle lasted about five years; the average boom lasted slightly more than four years, while the average recession lasted slightly less than one year on average.

The phases of business cycle divided into stages, which are as follows:

The straight line represents the constant growth line in the centre of the figure above. As the business cycle travels down the line, so does the economy. The following sections provide a more in-depth explanation of each stage of the economic cycle or in phases of business cycle:

1. Expansion:

The expansion stage of the business cycle is the first stage of the business cycle. This stage is marked by a rise in the number of positive other things. Debtors are usually prompt in making their payments on their obligations, the velocity of the money supply is strong, and the level of investment is substantial. This procedure will continue as long as the economic circumstances are suitable for the further growth of the enterprise.

2. Peak:

The economy achieves a saturation point, often known as a peak, at which time the economic cycle enters its second stage. The highest possible rate of growth has been reached. The economic indices show no signs of improvement and are at their greatest levels. Prices have reached their zenith. This stage indicates the beginning of the reversal of the trend of economic development. Consumers are more likely to reorganise their financial plans at this time.

3. Recession:

The recession is the stage that occurs immediately after the peak period of the economy. At the beginning of this phase, the demand for products and services begins to decline quickly and persistently. In many cases, producers do not recognise a drop in demand immediately and continue to produce despite the fact that the market is experiencing surplus supply. Prices are on the decline. As a result, all positive economic indices, such as income, production, wages, and so on, begin to decline in value.

A recession is a particular kind of vicious cycle, with cascading reductions in production, employment, income, and sales that feedback in yet another drop in output, spreading quickly from industry to industry and region to region as a result of the effects of the recession. This domino effect is critical to the spread of recessionary weakness across the economy. It is the driving force behind the co-movement of these coincident economic indicators and the duration of the recession.

4. Depression:

Depression is accompanied by an increase in the number of unemployed people. The economy’s growth rate continues to deteriorate, and when it goes below the steady growth line, the economy is said to be in a state of depression.

5. The trough:

The economic growth rate falls to zero during the depression stage of the economy’s development. It continues to fall for a while longer until the prices of factors, as well as the demand for and supply of products and services, shrink to their smallest possible value. Eventually, the economy hits its nadir, as the saying goes. It is the moment at which an economy has reached negative saturation. There has been a significant reduction in national revenue and spending.

6. Recovering:

The economy enters a period of regaining momentum. It is during this phase that the economy starts to turn around and recover from the previous period of negative growth rates. Because of the cheap costs, demand begins to rise, and as a result, supply begins to expand as well. The populace begins to adopt a more optimistic attitude toward investment and employment, and the rate of output begins to rise. In contrast, a business cycle recovery starts when the vicious recessionary cycle is reversed and becomes a virtuous cycle, with growing production generating job increases, rising incomes, and increased sales that in turn feedback in an even greater increase in output. Recession: Only if the recovery becomes self-sustaining and results in prolonged economic growth can it be expected to last and result in a sustained economic expansion. This is guaranteed by the domino effect, which drives the spread of the revival across the economy.

Of fact, the stock market does not represent the whole economy. It is important not to mistake this with market cycles, which are tracked by broad stock price indexes and are irrelevant to the business cycle.

Employment:

In phases of business cycle, we include this employment factor also. Employment is beginning to increase, and lending is beginning to show signs of improvement as a result of the accumulation of cash balances with the banks. When depreciated capital is replaced, fresh investments in the manufacturing process are made, which results in increased productivity. The recovery process will continue until the economy recovers to its previous levels of stable growth. This brings the phases of business cycle to a close after one full cycle of expansion and recession. The extreme points are the apex and the trough of a wave cycle.

Economists’ explanations:

  • According to John Keynes, the occurrence of phases of business cycle is a consequence of variations in aggregate demand, which cause the economy to reach short-term equilibrium states that are distinct from those associated with full employment.
  • Despite the fact that Keynesian models do not necessarily predict periodic economic cycles, they do suggest cyclical reactions to shocks via the use of multipliers. When it comes to investment, the degree to which these variations are felt is determined by the level of aggregate production.

Conclusion:

In contrast, economists such as Finn E. Kydland and Edward C. Prescott, both of whom are affiliated with the Chicago School of Economics, have questioned the Keynesian ideas of the 1930s. They believe that variations in the growth of an economy are not caused by monetary shocks but rather by technological shocks, such as those associated with innovation.

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