Business Cycle / economic cycle: How to Measure It, 4 stages

Business cycle, also known as the economic cycle, is the cyclical nature of the relative rise and fall of economic activity over a definitive period. These cycles are noteworthy by phases in the growth and contraction of economy, which speaks of its strength or otherwise. This was very useful because understanding the business cycle helps policymakers, businesses investors and even consumers in making relevant decisions on the economy.

 

OVERVIEW OF BUSINESS CYCLE

The business cycle is primary in the domain of macroeconomics. It explains how these measures of economic growth move up and down over time in terms of GDP, employment and income. Two business cycles will never be same, but it is established that they go through similar stages and hence can be analyzed to forecast future periods.

Economic cycles are caused by the behavioral pattern in controlling and managing governmental policies, consumption pattern, technological changes, and extrinsic circumstances such as political instabilities or natural calamities. These cycles are perfectly understandable part of the economies and studying these proves useful for understanding how economies work and evolve.

 

HOW TO MEASURE BUSINESS CYCLE

Economists rely on several indicators and methods to measure and analyze the business cycle:

Gross Domestic Product (GDP):

• Gross Domestic Product is the most widely employed indicator commenting on the business cycle. This measure embodies the total market value of all the goods and services that are produced in any given country during a given year. GDP up means expansion and down means contraction.

Unemployment Rate:

• Another is the unemployment rate. Technically, low unemployment is normally compatible with economic growth while high unemployment tends to agree with the stage of contraction.

Consumer Confidence Index (CCI):

• This index captures a balanced positive attitude or a negative outlook of the consumer towards the economy. It is often found that when the levels of confidence are high, expansion is expected and when the levels are low a downturn is expected.

Industrial Production Index:

• This index measures the production of factories, mining industries and utility industries. It is a direct measure of economic activity and assist us in determining the present stage of the business cycle.

Leading Economic Indicators (LEI):

• Examples of LEIs are; changes in stock market, housing commencement, and incidences of new business establishment. Such indicators work as signals or early warning about the state of economy.

Interest Rates and Monetary Policy:

• Economic cycles are controlled by the central banking through the regulation of interest rates. Reduced rates promote economic expansion, which on the other hand, increased rates seek to domestic inflation and bring down economic activity.

Inflation Rates:

• Inflation is normally a sign of growth while deflation or high inflation is normally an indication of an unpairing economy.

 

FOUE STAGES OF BUSINESS CYCLE

The business cycle is typically divided into four distinct stages: There are six phases here which are expansion, peak, contraction, and trough. They all represent a certain level of economic activity and have some peculiarities.

1. Expansion:

In the expansion phase the economy moves up, companies and industries thrive. Key features of this stage include:

• Rising GDP.
• More consumption by customers, and organizational expenditure on goods and services.
• Lower unemployment rates.
• Increase in industrial output.
• Stable or moderate inflation.

Example:

An expansion phase might be caused by technological breakthrough like the inception of internet selling in the early 2000s. Employment grows as companies add staff, and companies create products to sell as consumers’ needs are higher.

2. Peak:

The Peak can be used to describe the high level of economic activity. Although it is the phase of maximum growth, it also stands for the phase of the expansion of a business. Characteristics include:

• High GDP growth rates.
• Low unemployment, maybe in the range of, or even below the level of natural unemployment.
• High inflation is common to overheating economy.
• Bubble in stock and share market or property market.

Example:

The dot-com bubble best defines a peak because high stock prices for technology and other new age-related investments represented one full cycle of expansion.

3. Contraction (Recession):

The contraction phase on the other hand represents weakness in the economic activity, normally referred to as a recession if it lasts for two or more quarters. Key characteristics include:

• Declining GDP.
• Rising unemployment.
• Decreased consumption by the clients and various organizations.
• Falling industrial output.

Example:

The recession that occurred in the global financial system in 2008 was contraction phase caused by a collapse of housing market and failures of financial institutions accompanied by erosion of economic growths.

4. Trough:

The trough is the point which actually lies in the bottom of the business-cycle best described as the nadir in economic activity levels. This is followed by the beginning of a recovery period which means the growth has begun again. Key characteristics include:

• Sustaining GDPs at low figures.
• Moderate but stable current and future unemployment levels.
• More government and centrally banked measures (for example, the stimulus program).

Example:

Second trough was in 2009 when synchronized fiscal and monetary measures started to restore the global economies after the 2008 crisis.

 

 

 

 

Explanation of the Graph:

It shows that the economy expands in these areas, that is, a condition in which GDP increases over time.

The highest point is that which is before the commencement of a fall.

Decline or shrinkage is shown by a downward slope and when the GDP is shrinking.

The trough is also the bottom before cycle goes back to the upward movement.

 

FACTORS INFLUENCING THE BUSINESS CYCLE

Several factors drive and influence the business cycle:

Demand-Side Factors:

• Consumption expenditure, investment outlay and government expenditure are considered as causing the fluctuations in this cycle.

Supply-Side Factors:

• Accessibility of the materials, personnel, and technology breathes life into production and the economy.

Government Policies:

• Here fiscal measure as tax reduction or spending programs as well as monetary measures as interest rates are prominent.

Global Events:

• These may be shifts in international relations, outbreaks of diseases such as the current pandemic, or wars and other factors influence the economic cycles, shifting the business cycle.

Financial Markets:

• Consumer and business confidence is determined by trends in the stock market and credit facilities.

 

WHY BUSINESS CYCLE IS SIGNIFICANT

For Policymakers:

• Assists in designing accurate fiscal and monetary policies that will stabilize an economy.

For Businesses:

• Functions in planning and forecasting, mobilization of resources, and control and management of risks.

For Investors:

• Forces prompt market entry/exit by establishing the right time to invest in a given market.

For Consumers:

• Is involved in decisions concerning expenditure, accumulation, and credit worthy on the existing economic factors.

 

CONCLUSION

The business cycle is a cyclical and expansive activity, which affects comprehensively all aspects of the economy. Awareness of these cycles and their causes assist stakeholders manage economic fluctuations These cycles include the well-known economic cycle on how it can be understood include. Although economic cycles are inevitable, appropriate action plans and successful management decisions contribute to the reduction of the negative impact of cyclical fluctuations and the effective use of the growth phases.

 

FAQ

What is a Business Cycle?

Business cycles are fluctuations of economic growth that occur within some period of time. It therefore works under periods of expansion during which economic activity is at its highest, and periods of contraction during which the economic activity is at its lowest. These cycles are essentially fluctuating functions of consumer confidence, interest rates and macro-economic factors.

 

What Is Business Cycle Phases?

The business cycle is typically divided into four main phases:

• Expansion: The GDP of the country steps up during this phase while the unemployment rate reduces. The consumer confidence is high and therefore consumers are encouraged to spend and even invest more.
• Peak: During this phase it is observed that the rates of economic activities are at their highest. At this stage, there is full employment, and there may be increasing signs of inflation.
• Contraction (Recession): After reaching the apex, the economy has a phase in which economic activities begin to shrink. This can result in increased levels of unemployment, as well as decreased levels of consumption among the populace.
• Trough: The trough is the extreme of the down turn on the business cycle representing the lowest economic activity. It is usually a phase that takes place before a recovery and shows the end of a recession.

 

What is Business Cycle & Trade Cycle?

The two terms; business cycle and trade cycle are actually synonyms, although the former seems to be more extensive and general in its definition when compared with the latter. In its broader meaning, the term business cycle is used to describe the oscillations of total economic activity while when used in the context of trade and business it defines fluctuations relating to trade or commerce exclusively. Each of them demonstrates the same economic growth process but can focus on the performance of certain indicators.

 

What is Economic Cycle?

Business cycle is explained by another name called economic cycle as it denotes the larger system involved in rhythmical oscillations. It contains the same phases that are expansion, peak, contraction and trough and encompasses total economy aspects within a given area such as inflation rates, employment levels, and consumer behavior.

 

What is the Peak Phase of Business Cycle?

The business cycle indicates the high point after which there is a decline and is synonymous with the apex of economic activity. In doing this phase, vital characteristics like gross domestic production, employment, and production are optimum. Still, this phase is marked by rising inflation to indicate that the economy is getting overheated and might soon slow as it enters a downturn phase.

 

What is boom phase of the Business cycle?

Less frequently it is included into the expansion phase which is characterized by escalating rates of grow, consuming expenditure and investment. Businesses are profitable; unemployment rates decrease; and everyone including the business men and women is confident with the economy. But this phase may also lead to disparities including inflation and asset speculation which causes the next phase of the contraction.