What is a Business Cycle?
Written by True Tamplin, BSc, CEPF®
Updated on July 7, 2021
Business Cycle Defined
The business cycle is the upward and downward motion of the economy.
The business cycle consists of six phases:
The peak of the business cycle is when the economy has hit it’s max growth. The peak can usually be identified when the growth indicators for the market stop going forward and remain stagnant. Another identification is when companies restructure or enforce an employee hiring freeze. With the market remaining stagnant, businesses and the economy start contracting and this stage is classified as a recession. During this phase, unemployment rises, salaries remain the same or decrease, and general production slows dramatically. Should the recession continue, this could potentially lead to a depression. A depression is when production is at a minimum, unemployment continues to rise, and companies struggle to gain revenue and potentially go bankrupt.
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Business Cycle Phases
After a period of time, the depression hits the bottom which is classified as the trough.
The trough can be signaled by unemployment remaining level and businesses starting to see production levels increasing.
With prices being low, this can spark an increase in demand which will increase employment and production simultaneously.
This stage of the business cycle is called the recovery stage.
The last and final stage of the business cycle is the expansion phase.
In this phase, companies tend to hire employees at a faster rate, production and sales increase.
Also in this phase, people tend to pay their debts on time and investing in companies and the market is increasing.
The business cycle shows how the real gross domestic product fluctuates over a period of time going through phases of output increases and decreases.