What is the business cycle, and how does it relate to economic fluctuations?

What is the business cycle, and how does it

relate to economic fluctuations?

Business cycle is defined as the recurring fluctuations in the overall economic activity in

an economy. Level of economic activity is identified with level of income, output, and

employment. Therefore, the business cycle in general may be defined as short-run

fluctuations in output, income, and employment.

Business cycle/ Trade cycle/ Economic cycle refers to as upward and downward

moments of the GDP (Gross Domestic Product) along its long-term natural growth rate.

It explains the expansion and construction in economic activity that an economy 

experiences overtime  

The business cycle typically consists of four phases: expansion, peak, contraction, and

trough. These phases illustrate how economic fluctuations relate to the business

cycle:

 

          1. Expansion (Boom or recovery): The prosperity or boom phase is characterized

by expansion in the level of output, employment, and income. The economy is

on boom phase, characterized by increasing economic activity and growth.

 

·         Increased Employment: Job opportunities and employment rates tend to

 increase as businesses hire more workers to meet rising demands.

·         Investment:  Business increase capital investment and expand operations to

 meet growing demand.

·         Growth in GDP:  The economy’s output as measured by Gross Domestic

 Product (GDP), is on the rise.

·         Consumer Spending: Consumers leading to higher spending on goods and

 services.

          2. Peak (Boom’s Peak):  The peak phase indicates the highest point of the

              business cycle where economic activity reaches its peak.

·         Maximum GDP: Economic output reaches its highest level.

·         Full employment: With low unemployment rates, the labor market becomes

 very tight.

·         High Consumer Spending:  Consumer confidence remains strong, resulting

 strong economic growth.

·         Optimism in Investments:  Investor are often excited, which drives up asset

 prices.

·         Potential for Overheating: There is a risk of the economy overheating,

 possibly leading to inflationary pressure.

 

      3. Contraction (Recession or Downturn):  A contraction often called recession or

          downturn, represents a period of reduced economic activity.

 ·         Falling GDP: Economic output contracts as GDP declines.

 ·         Unemployment Rises: Job cuts and layoffs become more common leading

  higher unemployment rates.

 ·         Reduced Consumer Spending: Consumers becomes cautions, which reduced

        spending on unnecessary items.

 ·         Stock Market Declines:  Stock prices falls as investor become more risk

   averse.

 ·         Business Cutbacks: Companies may cut back on production, investment

  hiring.

         4. Trough (Depression’s Bottom):  The trough phase represents lowest point in

     the business cycle and is characterized by the bottom-out of economic activity.

   ·         Lowest GDP: Economic output reaches its lowest level during this stage.

   ·         High Unemployment: Unemployment rates remains high, but they may

    stabilize or begin to improve.

   ·         Government Intervention: Policymakers often implement measures to

    stimulate economic activity.

  ·         Opportunity for Growth:  A trough is a turning point where economy has

   potential to begin recovery.