Introduction

The business cycle describes the rise and fall in

production output of goods and services in an
economy.
The business cycle is the natural rise and
fall of economic growth that occurs over
time. The cycle is a useful tool for
analyzing the economy. It can also help you
make better financial decisions.
• Definition: A business cycle, also called economic
cycle, is a period of changing economic activity
comprised of expansions and contractions as
measured by real GDP. In other words, it’s a
period of time where the economy grows, peaks,
shrinks, and bottoms out. Then the cycle repeats
itself.
• The business cycles are usually measured by
taking the real growth rate of GDP (gross
domestic product) into consideration.
 Features of business cycle
• Occur Periodically
As we saw, these phases occur from time to time. However
they do not occur in for specific times, their time periods
will vary according to the industries and the economic
conditions. Their duration may vary from anywhere between
two to ten or even twelve years.
• They are Synchronic
Business cycles are not limited to one firm or one industry.
They originate in the free economy and are pervasive in
nature. A disturbance in one industry quickly spreads to all
the other industries and finally affects the economy as a
whole. For example, a recession in the steel industry will set
off a chain reaction until there is a recession in the entire
economy.
• All Sectors are Affected
• All major sectors of the economy will face the adverse
effects of a business cycle. Some industries like the capital
goods industry, consumer goods industry may be
disproportionately affected. SO the investment and the
consumption of capital goods and durable consumer
goods face the maximum brunt of the cyclic fluctuations.
Non-durable goods do not face such problems generally.
• Complex Phenomenon
• Business cycles are a very complex and dynamic
phenomenon. They do not have any uniformity. There are
no set causes for business cycles as well. So it is nearly
impossible to predict or prepare for these business cycles.
• Affect all Departments
Trade cycles are not only limited to the output of
goods and services. It has an effect on all other
variables as well such as employment, the rate of
interest, price levels, investment activity etc.
• Business cycles are not seasonal fluctuations
Phases of Business cycle
• 1 Expansion
• The first stage in the business cycle is expansion. In this stage,
there is an increase in positive economic indicators such as
employment, income, output, wages, profits, demand, and
supply of goods and services. Debtors are generally paying
their debts on time, the velocity of the money supply is high,
and investment is high. This process continues until economic
conditions become favorable for expansion.
• Peak
• The economy then reaches a saturation point, or peak, which
is the second stage of the business cycle. The maximum limit
of growth is attained. The economic indicators do not grow
further and are at their highest. Prices are at their peak. This
stage marks the reversal in the trend of economic growth.
Consumers tend to restructure their budget at this point.
• Recession
• The recession is the stage that follows the peak phase.
The demand for goods and services starts declining
rapidly and steadily in this phase. Producers do not notice
the decrease in demand instantly and go on producing,
which creates a situation of excess supply in the market.
Prices tend to fall. All positive economic indicators such as
income, output, wages, etc. consequently start to fall.
• Depression
• During the trough phase, the economic activities of a
country decline below the normal level. In this phase, the
growth rate of an economy becomes negative. In addition,
there is a rapid decline in national income and
expenditure.
• Recovery
In this phase, there is a turnaround from the
depression and the economy starts recovering
from the negative growth rate. Demand starts
to pick up due to the lowest prices and
consequently, supply starts reacting, too. The
economy develops a positive attitude towards
investment and employment and hence,
production starts increasing.