Tuesday, June 12, 2012

Business Cycle: The Four Phases

A business cycle has been defined as the tendency of economic activity to go oscillate between periods of expansion and contraction. Because the fluctuations are unpredictable however (as displayed in the graph above), many economists point out that “cycle” is a misleading term. In any case, the phrase is still used today.
Here are the four phrases of a business cycle (almost always in this order)

I. Contraction/Recession: Economic activity slows down. This period, if really bad, could even be a depression.
II. Trough: A turning point right after contraction. Economic activity rises and turns to the third step, expansion.
III. Expansion/Boom: Rise in economic activity
IV: Peak: A turning point right after expansion. Economic activity slows and returns back to contraction.

As you can see, although the amount to which an economy contracts or expands is not constant, the phases will occur in a repeating manner.

This concept isn't very difficult! However, you should understand that this is a short-term graph and in the long term, Real GDP (output) will look somewhat like this:

This is because in the long-term, our economy will generally grow stronger as a result of improving technologies, etc.
And that's all the basics of a business cycle!

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