Business Cycle

Real GDP
Peak

Peak

Expansion

Expansion Recession

Trough
Time

Business cycle is also known as the economic cycle or trade cycle, is the downward and upward
movement of gross domestic product (GDP) under a long-term growth trend. The business cycle
is a useful tool for analyzing the economy. Each business cycle has four phases. They are
expansion, peak, recession/contraction, trough.

Expansion is the phase of the business cycle when the economy moves from a trough to a peak.
Expansion means economy is very good. In expansion stage, there is an increase in various
economic factors, such as production, employment, output, wages, profits, demand and supply of
products and services. There is also a rise in living standard of population. Moreover, also means
that economy is moving out of recession. Money is cheap to borrow, businesses build
up inventories again and consumers start spending. Therefore, GDP rises, per capita
income grows, unemployment declines, and equity markets generally perform well. Besides, also
increase the inflation of the economy.

Peak is the second phase of business cycle. Peak is the highest point between the end of an
economic expansion and the start of a recession in business cycle. In peak phase, economic
growth in a business cycle before the market enters into a period of recession. Moreover, there is
an increase in growth rate of business cycle achieves in maximum limit. In peak phase, the
economic factors, such as production, profit, sales, and employment, are higher, but do not
increase further. In peak phase, there is a gradual decrease in the demand of various products due
to increase in the prices of input.

Contraction is the third phase. It is the period from peak to trough. In the peak phase, the demand
for various products is stagnant due to the increase in the prices of input. Then, the demand of
products starts declining in certain sections of the economy. This leads to the starting of the
contraction phase of the business cycle, which is also the opposite of the expansion phase. In the
contraction phase, the level of employment, production, prices, saving and investment decrease
along with the demand. Normally, producers may unaware of a decrease in demand for products
and continue to produce goods and services. Hence, the supply of products exceeds the demand
and leads to a surplus in the market. Once the producers become aware of the shift in the
economy, they start disinvesting in factors of production such as labour and capital. At this
turning point in the economy, the prices of the goods also fall. Therefore, the stocks will enter a
bear market as investors sell. A recession also occurs if a contraction is severe enough.

The trough is the fourth phase. It is the phase where the economy transitions from the contraction
phase to the expansion phase. It is a severe form of recession. During the trough phase, the
economic activities of a country decline below the normal level. In this phase, a negative growth
rate in an economy can be seen. There is extensive depletion of national income and expenditure.
Besides, the level of the economic output of a country also becomes low. In the trough phase,
investors do not invest in stock markets. The companies cannot dispose of their stocks keep
reducing the prices. Therefore, some weak organizations will be forced to shut down or rather
dissolve due to mounting losses. This will leads to a high unemployment rate inversely. At this
point, the economy is shrinking.