What Are The Four Types Of Business Cycle – The business cycle is the cycle of fluctuations in gross domestic product (GDP) around its long-run natural growth rate. It explains the expansion and contraction of economic activity that an economy experiences over time.
An economic cycle ends when it goes through a sequence of one boom and one bust. The time it takes to complete this sequence is called the length of the business cycle. A boom is characterized by a period of rapid economic growth, while a period of relatively stagnant economic growth is a recession. It is measured by real GDP growth adjusted for inflation.
What Are The Four Types Of Business Cycle
In the graph above, the straight line in the middle is the line of steady growth. The business cycle moves along a straight line. Below is a more detailed description of each stage of the business cycle:
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The first stage of the business cycle is expansion. During this phase, there is an increase in positive economic indicators such as employment, income, production, wages, profits, demand and supply of goods and services. Borrowers generally repay their debts on time, the money supply is fast and investments are high. This process continues as long as economic conditions are favorable for expansion.
The economy then reaches a saturation point or peak, which is the second phase of the business cycle. The maximum growth limit has been reached. Economic indicators are not increasing and are at the highest level. The prices are at the top. This phase represents a reversal in the trend of economic growth. Consumers are currently tending to restructure their budgets.
A recession is the phase that follows a peak. In this phase, the demand for goods and services begins to decline rapidly and permanently. Manufacturers do not immediately notice a decrease in demand and continue to produce, which creates a situation of excess supply in the market. Prices tend to fall. All positive economic indicators such as income, production, wages, etc. therefore they begin to decline.
There is a proportional increase in unemployment. Economic growth continues to decline, and when it falls below the steady growth line, this phase is called a depression.
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During the depression phase, the economic growth rate becomes negative. There is further decline until factor prices and the demand and supply of goods and services agree on the lowest point. The economy will eventually bottom out. It is a negative point of saturation of the economy. There is a significant outflow of national income and expenditure.
After the crash, the economy enters a recovery phase. In this phase, the economy turns around and begins to recover from negative growth rates. Due to the influence of low prices, the demand starts to increase and thus also the supply. The population develops a positive attitude towards investments and employment, and production begins to increase.
Employment is starting to increase and lending is also showing positive signs due to cash balances accumulated with bankers. In this phase, depreciated capital is replaced, leading to new investments in the production process. The recovery will continue until the economy returns to a level of sustainable growth.
This completes one complete boom and bust business cycle. The extreme points are the top and the bottom.
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John Keynes explains that the occurrence of business cycles is the result of fluctuations in aggregate demand that bring the economy to a short-run equilibrium that is different from the full-employment equilibrium.
Keynesian models do not necessarily depict periodic business cycles, but assume cyclical responses to shocks through multipliers. The extent of these fluctuations depends on the level of investment, as it determines the level of aggregate output.
In contrast, economists such as Finn E. Kidland and Edward S. Prescott, associated with the Chicago School of Economics, challenged Keynesian theories. He sees fluctuations in economic growth not as the result of currency shocks, but as the result of technological shocks such as innovation.
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Understanding the economic cycle can help investors and businesses decide when to invest and when to pull their money, as each cycle affects stocks and bonds, as well as corporate earnings and profits.
The business cycle is the circular motion of the economy as it moves from expansion to recession and back again. Economic expansion is characterized by growth and contraction, including recession, i.e. a decrease in economic activity that can last for several months. The business cycle or business cycle is characterized by four phases.
During an expansion, the economy experiences relatively rapid growth, interest rates tend to be low, and output increases. Growth-related economic indicators such as employment and wages, corporate profits and output, aggregate demand and supply of goods and services tend to show steady growth trends during the expansion phase. The flow of money through the economy remains healthy and the value of money remains cheap. However, an increase in the money supply during a period of economic growth can stimulate inflation.
The peak of the cycle is when growth reaches maximum speed. Prices and economic indicators may stabilize for a short time before going into recession. Peak growth usually creates some imbalances in the economy that need to be corrected. As a result, businesses may begin to reassess their budgets and spending when they believe the economic cycle has peaked.
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A correction occurs when growth slows, employment falls and prices stagnate. When demand falls, businesses may not immediately adjust production levels, leading to oversupplied markets and falling prices. If the contraction continues, the recessionary environment could degenerate into a depression.
The bottom of the cycle occurs when the economy bottoms out and supply and demand recover. The low point of the cycle is a painful time for the economy, with the widespread negative impact of stagnant spending and income. A low point allows individuals and businesses to restructure their finances in anticipation of a recovery.
Key indicators determine where the economy is and where it is headed. The National Bureau of Economic Research (NBER) is the definitive source of official dates for US business cycles. The NBER relies primarily on changes in GDP and measures the length of economic cycles from trough to trough or peak to peak.
Since the 1950s, the average US economic cycle has lasted about five and a half years. But there are wide variations in the length of the cycles, ranging from 18 months during the peak-to-peak cycle from 1981 to 1982 to the expansion that began in 2009. The first was in the fourth quarter of 2019, at the peak of quarterly economic activity. The monthly peak occurred in another quarter, which was recorded in February 2020.
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This wide variation in cycle length dispels the myth that economic cycles are normal natural activity, similar to physical waves or the swing of a pendulum. However, what factors contribute to the lengthening of the business cycle and why they exist in the first place are debated.
Businesses and investors must steer their strategy through economic cycles, not to control them, but to survive and perhaps profit from them.
Governments, financial institutions and investors manage the course and effects of economic cycles in different ways. During a recession, the government may use expansionary fiscal policy and rapid deficit spending. It may also attempt contractionary fiscal policy, taxation, and running a budget surplus to reduce aggregate spending to prevent the economy from overheating during an expansion.
Central banks can apply monetary policy. When the cycle is down, the central bank may lower interest rates or implement expansionary monetary policy to stimulate spending and investment. During expansion, it can use contractionary monetary policy, raise interest rates and slow down the flow of credit to the economy.
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During the expansion, investors often find opportunities in the technology, capital and energy sectors. When the economy contracts, investors can buy companies that do well in a recession, such as utilities, consumer goods and health care.
Companies that track the relationship between their performance and business cycles can plan