What is the Business Cycle? | Definition | Phases | Characteristics


The Business Cycle

  • In economy, the Business Cycle shows fluctuations in the level of economic activity in an economy over time measured by changes in GDP and suggests that the changes are cyclical.
  • Phases in the business cycle include:
    • Trough
    • Expansion:
      • Recovery
      • Boom
    • Peak
    • Contraction:
      • Recession
  • It represents how economies go through good times and bad times.
  • Also, showcases the actual cycle as well as the long run potential output.


  • It represents effects of:
    • Interest rates:
      • The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
      • A country’s central bank is responsible for determining this, who work with the government but separate from them.
    • Direct tax rates:
      • Taxes on your income.
      • Are avoidable whereas indirect taxes are unavoidable.
    • Unemployment rates:
      • a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force.
    • Inflation:
      • a general increase in prices and fall in the purchasing value of money.

ALSO READ: What Is Inflation?

    • Deflation:
      • reduction of the general level of prices in an economy
  • Characteristics of each phase of the business cycle.
    • Trough:
      • lowest point.
      • prices too low
      • consumers can still spend a substantial amount.
    • Recovery:
      • more spending
      • more production
      • decreased taxes and interest rates
      • less incentive to save money in the bank
      • more capital
      • improving employment rate
    • Boom:
      • price levels rising (inflation)
      • increase in taxes and interest rates
    • Peak:
      • highest point.
      • prices too high to maintain.
    • Recession:
      • two consecutive quarters (6 months) of negative GDP growth, that is, falling GDP.
      • characteristics include:
        • increased unemployment
        • lower rates of inflation, or even deflation.
        • shown by:
          • a low unemployment rate
          • no capital
          • falling price levels (deflation)
          • increased income inequality gap
          • more poverty
          • lower living standards
          • over the top taxes and interest rates
          • no spending



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