The business cycle is also known as the economic cycle, Well it is used to understand the rise and fall of the economy of the countries. Where there are phases to show the position of the country.
let’s dive deep to understand what is a business cycle is and its Phases.
What is Business Cycle?
“Business cycles are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycles vary from more than one year to ten or twelve years; they are not divisible into shorter cycles of similar characteristics with amplitudes approximating their own.”
According to Arthur F. Bums and Wesley C. Mitchel
Business Cycle is a series of stages of rising and falling of the GDP(Gross Domestic Product) over a long-term period of economic growth. Where it shows expansions and contractions in economic activity that a nation experiences over a long period.
Business Cycle is also known as Economic Cycle or Trade Cycle. Based on the economic activities such as countries’ decisions in the new policy, unemployment rate, supply, and demand, which will affect the upwards and downwards of the economic growth.
Phases in Business Cycle:
There are 6 stages in the business cycle as we can see in the above image, Here are a detailed view of these stages:-
1) Expansion
Where the economy of a country will be in the growing stage until it reaches a peak. All new economies will face expansion or any new government formed will see the expansion.
2) Peak
Peak as its name says the peak of the economic growth in the period. The next stage after the expansion is the peak. Once the economy is reached the highest point after that started falling, that point is called Peak.
3) Recession
This is the stage where the economy will fall after reaching Peak. It can happen due to sudden changes in the policy of the economy or the international market’s effects on the economy and many more.
5) Depression
This is the stage where GDP continues to fall below the growth line. In this stage where you increase the unemployment rate and inflation etc.
4) Trough
This lowest point of the economy can fall, and the Growth rate will be negative. Where you can see a fall in national income and there will be layoffs, declining business sales and earnings, and lower credit availability. This will be the end of the decline in the growth rate.
6) Recovery
After Trough the economy started recovering from its lowest point. At this stage, there will be increasing in the employment rate, and a Slowly increase in sales and earnings of the business. Where the economy will come to normal. And after this stage, again expansion will come.
With this, there will be a cycle, where every stage will repeat again.
Why Business Cycle is so important?
- Formation of Policies:- With the help of the Business Cycle, We can understand what type of Policies or reforms made an impact on the GDP’s rise or fall for a country.
- Companies Decision Making:- Based on the business cycle a company can make strategic decisions. Where at the time of expansion or recovery, many companies can increase production or add new products. but at times of Depression or Trough most important in retaining in the market by cutting some products, limiting resources, or focusing on strengths.
- Market entries and exits:- Where new companies or startups can emerge based on the business cycle and also there will be exits for some companies due unable to sustain in the markets.
Conclusion
Business Cycle is one of the important aspects to understand economic performance. Which an economy can create a new policy or introduction new reforms and also helps to abolish old policies and reforms. Companies can make better strategies based on the cycle.
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