The Business Cycle and where recession feature in it

advertisement

The periodic expansion and decrease of a nation's economy, as measured primarily by GDP, is known as a business cycle.

Business cycles frequently influence the stock market, which represents the economy's natural ebb and flow.

Governments attempt to control business cycles by increasing or decreasing expenditure, raising or reducing taxes, and altering interest rates.

Individuals can be affected by business cycles in various ways, from job seeking to investing.

A business cycle, often known as an economic cycle or trade cycle, describes the economy's stages as it expands and decreases. It is generally assessed by the rise and fall of a country's gross domestic product (GDP), which is constantly repeated.

All countries with capitalist economies experience business cycles. These natural cycles of expansion and decline will occur in all such economies, but not all at the same time. However, due to greater globalization, business cycles are more likely to occur at comparable times in different nations than they were previously.

Understanding the various stages of a business cycle may assist individuals in making lifestyle decisions, investors in financial decision making, and governments in making policy decisions.

A business cycle's stages

Consider business cycles to be like the tides: an ever-changing, natural ebb and flow from high to low tide. And, just as waves can appear to surge even when the tide is moving out or appear low while the tide is coming in, there can be intermediate, counter-cyclical spikes up or down in the middle of a phase.

The business cycle depicts how a country's overall economy changes over time.

A prolonged period of economic expansion is followed by a protracted period of an economic downturn in every business cycle. A business cycle passes through four distinct stages, known as phases, during the course of its life: expansion, peak, contraction, and trough.

Expansion:

Expansion is an uptime that is deemed "natural" or, at the very least, the most desired condition of the economy. During an expansion, corporations and businesses consistently increase their output and earnings, unemployment tends to be low, and the stock exchange performs well. Consumers are purchasing and investing, and as a result of the increased demand for products and services, prices are rising as well.

When GDP growth is between 2% and 3%, inflation is below 2%, unemployment is between 3.5 and 4.5 percent, and the stock market is in a bull market, the economy is in a healthy expansion phase.

Peak:

However, whenever these figures begin to rise outside of their usual bands, the economy is regarded to be out of control. Businesses may be expanding too quickly. Investors have become overconfident, buying assets at inflated prices that are not backed by their underlying worth. Everything is becoming too expensive.

All of this frenetic activity comes to a head at the peak. It occurs when a period of expansion has ended, indicating that prices and production have reached their maximum levels. This is the tipping point: With no more opportunity for development, there's only one direction to go: down. A contraction is on the way.

Contraction:

From peak to trough, a contraction lasts a certain amount of time. It's the time of year when the economy is slowing down. Unemployment rates typically rise during a downturn, equities fall into a bear market, and Gross domestic product (GDP falls below 2%, showing that firms have curtailed their operations.

When the GDP falls for two quarters in a row, the economy is deemed to be in recession.

Trough:

The trough is the cycle's low point, while the peak is its high point. It happens when the recession phase reaches its bottom and begins to bounce into an expansion phase, resuming the business cycle. Along the path to complete economic recovery, the comeback is not necessarily swift or in a straight line.

See Similar Posts: