A Business Cycle in the Economy |The Complete Guide

Most of us have heard the term ‘Business Cycle’ in one context or other , haven’t we? Well here we are, making a little effort to spread awareness & understanding about each nitty gritty of Business Cycle in the economy .

What is it and how does it work?

Business cycles quite simply refer to the ups and downs of a gross domestic product (GDP).    These ups and downs, or expansions and contractions, repeat on a cycle.  These are a common measure of finance in countries of a capitalist nature.  They are sometimes referred to as trade cycles or economic cycles.

  What ever they are known by within a certain company, the concept is the same.  Grow occurs through a boom and the company expands until a peak is reached.  At this point the company contracts due to there being no more growth potential within the current venture.  The company continues to contract until a trough is reached where the bottom is reached.  This then triggers a second boom, and the company expands.  The cycle is repeated.  There are different stages to business cycles which are explained in this article.

All companies have a steady growth line which is important to keep in mind through these stages.  Companies regularly move above and below this line as demand for their products or services alter.

Expansion

Stage 1 is an expansion which shows how far a company rises from a trough (explained further on).  All expansions being at the end of the trough stage.  The expansion phase continues until a peak is reached which signifies no further growth can take place.   The longer there are positive financial conditions, expansion will continue.  Wages, cash flow and profits are all useful indicators that expansion is taking place.

Peak

Stage 2 is the peak. 

This occurs when no further expansion can take place, the phase has reached the top and peaked.  Prices are at their peak and all economic indicators show no further signs of growth anymore. 

Recession

Stage 3. A recession begins at the end of the peak stage and shows a downward trend in terms of business and economic.  It is not always noticeable straightaway when a peak occurs, but it is easily spotted when the useful economic indicators start to fail.  As a general rule, when the GDP has dropped for 2 consecutive quarters, the economy is considered to be in recession.

Depression

Growth has continued to fall and is now below the steady growth line.  Economic growth continues to fail, and unemployment figures can increase during this stage. 

Trough

In simple terms, this is the exact opposite in terms of position to the peak stage.  A trough is achieved when depression cannot drop any lower and a natural low point is reached. 

Companies are often in a negative situation when a trough is reached and see their natural income streams drying up.  At the point where a trough is complete, a recovery begins.

Recovery

The final stage of the cycle which signifies the starting the cycle again.  A recovery appears when the end of the trough is reached.  The company cannot go any lower in terms of finance and value. 

‘There is a turnaround in fortune,’ reports Freda Jones, a business writer at Lucky Assignments Belfast. ‘Businesses also see customers and consumers renewing their faith in the company.’

Business begins to rise towards the steady growth line once more and aiming for another peak.  How highly it rises is dependent on supply and customer engagement.

At this point, one full business cycle is now completed.  The two main indicating points are the peak and the trough as these represent the absolute top and the absolute bottom levels of the current venture.

Market vs Business

There are market cycles and business cycles which are similar in that they have peaks and troughs.  The main difference between market cycles and business cycles is that market focuses on the stock market and business reflects the entire economy.

As business cycles move in natural phases, they can be manipulated.  Countries have been known to speed up or slow down the stages of the cycle.  The government can use something called a fiscal policy which can come into effect during the contraction stage.  This can be by reducing the amount of tax to be paid by the consumer so that they have some spare cash to spend.  Having more disposable income helps boost communities in the area and starts to reverse the contraction stage.

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Hopefully you found the article above informative & useful . Please do glance at other Business & Finance related content rich articles published in Inside Out with Rahul Yuvi :

All about Business, Finance & Stocks

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Namaste & Take Care till Next Post !!

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