The Business Cycle Business Cycle A business cycle is a term employed by economists to depict the patterns of expansion and contraction of the national economy. The business cycle is not a predictable, repetitive, or regular process, and it is measured by the oscillation of macroeconomic variables such as the real GDP. Nevertheless, researchers in this discipline have identified that although the process is unpredictable, it has a tendency to follow a given pattern when it occurs. According to economic analysts, a business cycle follows the route of contraction, trough, expansion, and peak (Tvede, 2006).
Each of the four stages is characterized by certain developments. The knowledge of this cycle is helpful to decision makers. The Contraction Stage is among the four stages of business cycle. This stage is also referred to as the depression phase. During this stage there the aggregate economy is shrinking. The business firms tend to reduce the amount of output leading to a rise in the rate of unemployment. Because of unemployment, the purchasing power of the general population is lowered. Consequently, the sales achieved through the retail businesses in the country decline.
The government can employ either monetary or fiscal policies to avert the dangers of this phase (Tvede, 2006). For instance, the government can lower the interest rates to heighten businesses as well as improve the consumer spending. If this is not done, the country’s economy can go into a recession. The contraction is followed by the trough phase. This is the stage that bridges the contraction and the expansion phases. This period is characterized by a recession in the national economy. The country suffers the highest rates of unemployment.
The amount of output produced is at its lowest whereas the Gross Domestic Product is negative. The economy may experience continued periods of negative GDP. If the country registers appositive GDP, this implies that the economy is on its way out of the trough phase. However, the country may suffer a double-dip recession. This occurs when the economy registers a positive GDP for two or three times followed by a negative. Nevertheless, if the country registers a positive GDP for a lengthy period, it is a sign of recovery (Tvede, 2006). Subsequently the contraction phase is followed by the expansion phase.
This is the phase in which the national economy takes a turning point from the recession to growth. The phase is also referred to as the recovery stage. This stage is as a result of several consecutive series of positive GDP. The businesses start to register growth, jobs increase, and the employment rate is lowered. In the same phase, the income by the general population is improved. Consequently, the rise in the personal income boosts the purchasing power of the public hence an augment in the consumer spending.
The businesses profitability is increased, and this leads to the expansion of investments (Tvede, 2006). The stock market gains vigor and banks extends their credit. The many developments such as rise in profits, aggregate demand, employment, income, and production levels lead the national economy into prosperity. The expansion phase is followed by the peak phase also referred to as the prosperity phase. At this phase the economy is performing at its best. The level of the economic output as well as the employment levels is at their highest.
In addition, the massive developments in the economy improve the living standards of the general population. However, economic analysts indicate that the peak levels are not healthy for the economy. If the economy grows at a very high rate the worth of the dollar drop, and there is a rise in the rate of inflation. This period is characterized by features such as increased output levels, a rise in the interest rates, increased effective demand, business hopefulness, high level of MEC, inflation, high income, and high level of employment (Tvede, 2006).
As a result of the maximum utilization of resources, the economy reaches its peak, and there is no furthers increase in the output levels. The economic activities in the country experience an upswing. However, it should be noted that as a result if the increase in the general prices of products and services, inflation sets in. Therefore, this stage can be an indication of a contraction phase in which the national economy experiences slimming down.
If the economy reaches this point, the business cycle starts over again. Reference Tvede, L. (2006). Business cycles: history, theory and investment reality. New York: John Wiley & Sons.