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Introduction to a Business Cycle

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by Beatrice Mastropietro · 6 min read
Introduction to a Business Cycle
Photo: Unsplash

If you’re not familiar with the business cycles, it can be challenging to know where to start. A quick look at the dictionary might lead you to believe that it’s a single event or period, but in reality, it refers to a series of stages that all businesses go through. In this guide, we’ll look at what each stage entails and how they affect your company.

A business cycle is a period that describes the natural ebbs and flows within an economy. The term “business cycle” can be used to describe both economic expansions and recessions. Generally, what we know is that a recession starts with a decline in production and sales levels. This decline usually lasts for 18 months or more before it reverses again into an expansion phase where production and sales increase once again.

Business Cycle Definition

A business cycle is a pattern in which the economy moves from one stage to another. This includes periods of growth and recession, expansion and contraction, boom and bust. The length of cycles can vary depending on the type of industry or sector you are looking at. The most important thing to understand about business cycles is that they happen naturally, due to economic forces, and without any interference by government policies or other actors in the marketplace.

The term can also refer to the complete business cycle, which consists of four phases: expansion, peak, contraction, recovery phase. This new recovery period will typically be at lower levels than that of the previous expansion period.

Stages in a business cycle include expansion, peak, recession, depression, trough, and recovery. The depression stage is when an economy falls into recession with rising unemployment rates and decreasing output levels of goods and services. The trough occurs as new investment begins to pick up again during the recovery stage. The expansion phase is when the economy starts experiencing economic growth, which peaks before entering another depression cycle.

For example, the depression stage of the 2008 recession followed a severe downturn in the economy from 2007-2009. The trough phase began as unemployment rates started to decline and investment levels increased by 2010. In December 2015, another depression cycle occurred as GDP decreased due to weak growth in investments and exports with rising inflation rates. This is why it’s important to understand depression and recovery stages and the trough and expansion phases of a business cycle.

The next depression phase occurred in December 2016. The expansion stage is what most people think of when they hear “business cycle.” This period typically occurs during the early stages of economic growth, often coinciding with low unemployment rates and high production. Economic output increases as businesses are profitable enough to make new investments in equipment or software. Businesses expand their workforce, which leads to a rise in consumption. As expansion continues, the economy reaches a peak stage where economic output is highest, and unemployment rates are meager.

The recession phase occurs when businesses begin to slow down their expansion efforts due to increased production costs or lack of demand for goods or services they offer. Since consumers are not spending as much money on goods, unemployment rates rise, which leads to decreased consumption. When expansion slows down, businesses are making less money and may be forced to close their doors or lay off workers to stay afloat.

Business Cycle Indicators

Business Cycle Indicators (BCI) are statistical measures of the economy. They include “a wide range of economic indicators” that can be used to help understand a country’s overall business cycle and in which direction it is heading. Business cycles refer to fluctuations in real GDP around its long-term growth trend or average output level over time. Indicators can help predict where a country’s economy is moving. Business cycle indicators include things such as employment, retail sales, and housing starts. They are usually measured by comparing two fundamental values: peaks and troughs in the overall business cycle, also called turning points or landmarks. BCI can also determine whether an economic expansion is strong or weak. Besides, they are employed by governments to prepare for upcoming changes.

Business Cycle vs. Market Cycle

The business cycle is a measurement of various factors that affect the economy,  while a market cycle is an indicator of economic trends over time.

Market cycles are more pronounced than business cycles because they reflect changes in supply and demand during different periods or seasons throughout the year. For example, if the economy is in a recession, it will take longer for market cycles to recover.

Businesses can be affected by either business or market cycles depending on their industry and sector of focus.

The four phases that make up both business and market cycles (expansion, peak, contraction, and trough) can be positive or negative depending on the economic climate.

Examples of Business Cycles

In the late 19th century, New England’s economy was characterized by a series of economic expansions and contractions. This cycle, known as the “New England” or “Boston Cycle”, spanned from 1845 to 1933. Until Ben Bernanke published his research paper “Nonmonetary Effects” in 1983, the reason for this pattern wasn’t fully understood. In short, the investment would rise during expansions while capacity constraints caused prices to fall. Firms would cut back on employment and wages during contractions. This pattern of behavior was discovered to be a key driver in the business cycle.

The Great Depression that lasted from 1929-1939 is considered one of the worst economic disasters ever experienced by modern economies. During this time lasting deflationary pressures led to massive consumer debt defaults and bank failures that resulted in widespread financial panic and global trade collapses. Many economists believe that this event resulted from an overly expansionary monetary policy combined with poorly regulated banking practices leading up to it.

Conclusion

A business cycle is the recurring rise and fall of a nation’s economy over time, as measured by fundamental gross domestic product changes. The economic fluctuations that occur at this rhythm are called business cycles. If we measure GDP and compare it to itself on different dates, we can identify periods when there were significant differences between these measurements. These observations represent peaks (or downturns) in the historical record of an economy because they denote times when GDP was significantly higher (or lower). Business cycles refer to short-run volatility around a trend growth rate and longer-term expansions and contractions from year-to-year data points. In addition to their cyclical nature, recessions also have specific characteristics that are observable in the data. The National Bureau of Economic Research (NBER) has compiled an official list for this purpose since 1920 by using its business cycle chronology and additional resources from outside economists who have proposed dates for particular economic events.

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FAQ

What is a business cycle?

A business cycle is a pattern in which the economy moves from one stage to another. This includes periods of growth and recession, expansion and contraction, boom and bust. The length of cycles can vary depending on the type of industry or sector you are looking at.

What are the phases of a business cycle?

The four stages of an economic cycle are expansion, peak, decline, and trough.

How is a business cycle different from a market cycle?

A market cycle refers to the stock market’s considerable growth and decline phases, while a business cycle reflects the economy as a whole.

Who measures business cycles?

The National Bureau of Economic Research examines quarterly GDP growth rates to define business cycle stages.

What factors shape a business cycle?

Factors that form a business cycle include many variables fluctuations, including government policies, interest rates, consumer spending levels, and international trade conditions.

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