What Are The 4 Phases Of Business Cycle?
The Economic Cycle is also known as Business Cycle – it refers to the fluctuations of an economy that takes place between the “Expansion” phase and the “Contraction” phase. There are undoubtedly many factors present that help in determining the stage or phase that the economic cycle is in. Some of the elements are total employment, Gross Domestic Product (GDP), Consumer Spending, and Total Employment.
Importance
Understanding the economic cycle aids businesses and investors in determining when to make investments and when exactly to drop out. It has a direct impact on the bonds and stocks as well as the profits and corporate earnings.
4 Phases Of Business Cycle
Here are the four phases of business cycle that form a crucial part in determining the state of the economy:
Expansion
During this stage, the economy experiences very rapid growth. In this stage, the interest rates are super low, and production considerably increases. The economic indicators are directly linked with development – such as corporate profits and output, employment and wages, and aggregate demand. Here, they tend to show sustained uptrends in this stage. The flow of money in this stage remains healthy, and the cost of funds is also inexpensive as the interest rates are super low.
However, if there is an increase in the supply of money, then that may lead to inflation during the economic growth phase.
Peak
The economy then reaches peak of a cycle, finally when the growth reaches its maximum rate (its highest point). At this highest mark of economy, the economic indicators and prices get stabilized for a short amount of time before reverting back to the downside.
This form of growth (peak growth) also typically leads to some imbalances in the economy that needs to be corrected. As a result of which, businesses may start re-evaluating their spending and set budgets when they believe that the economic cycle has reached its peak.
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Contraction
A correction occurs within a period of contraction when growth slows down, prices stagnate, and employment falls. As the demand begins to fall, the businesses may not suddenly adjust to the production levels – which in turn leads to oversaturated markets where a surplus of supply takes place, and there are high amounts of downward movement in the prices.
During this stage, the economic indicators that were earlier on an upward path during the expansion phase start to fall down. If the contraction eventually continues this way, then it spirals and leads to a depression.
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Trough
The trough of a cycle is reached when the economy hits the lowest point, where the demand and supply reach the lowest point before; eventually, growth begins to take place again.
The lowest point in an economic cycle refers to the widespread negative impact that comes out of fluctuating spending and income.
However, just like the peak, this low point also allows businesses and individuals to reconfigure their finances to predict recovery. Some of analysts even refer to the phase of “recovery” as the fifth phase in the cycle.
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Impact Of Economic Phases
When the economy is going through the expansion phase, the businesses considerably generate profits, which leads to the hiring of more employees – and even more disposable income and hence more expenditure of the same too. This, in turn, leads to more profits for the businesses, and this goes on to be a continuous cycle.
When the economy is going through a contraction, the businesses lose profits, leading to downsizing and laying off employees. When the employees lose their jobs, there is even less consumer spending and disposable income – which leads to a lower generation of profits. This continues in the form of a cycle as well.
An economy should also always be in a continuous expansion; however, there is also a need for contractions so that inflation ca be kept in check, and this will also ensure that the economy does not go into overheat.
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FAQs
Here are a few frequently asked questions regarding the four phases of the business cycle:
A: The Economic cycles refer to the downswings and upswings in an economy that last for a long period, usually 4-10 years.
A: The Mid-cycle is considered the most extended phase, which refers to moderate growth. The economic activity in this phase gains momentum, the credit growth intensifies, and the profitability becomes healthy as the monetary policies turn neutral.
A: The inflation rate responds to each of the phases in a business cycle. That is the natural peak and trough of economic growth that occurs over a long span of time. The cycle then corresponds to the highs and lows of a nation’s GDP (Gross Domestic Product), which measures all the goods and services produced in a country.
To Wrap It Up!
That was all for information regarding the economic cycle and its four primary phases.
Thank you for reading up till here. I hope you found the information useful. Let me know in the comments your thoughts on the same.
Author Bio:
Oriana Raven is a professional content writer with 3 years of blogging experience. After graduating from Princeton University in California, She began her career as a blogger. She writes for a number of well-known blogs, including Tour And Travel, Dream And Travel, WP Blogger Tips, smartbusinessdaily, Real Wealth Business, dreamlandestate, onlinemarketingtools. She enjoys writing to multiple international journals and magazine articles. Besides She likes listening to song, watching movies in her free time.
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