In this article, we will quickly explain to you what the business cycle is and what influences it. We will discuss its length, as well as its types.
What is a business cycle by definition?
The business cycle is a situation that occurs in a country over an extended period of time. It is based on variations taking place in the economic activity of a nation. The sequence of changes is repetitive, but not periodic. The business cycle is an example of an economic cycle.
For the business cycle to stay healthy, national income and employment levels should rise. When national income falls or the level of foreign trade decreases, the business cycle is not positive. The most commonly used measures of economic growth are primarily gross domestic product (GDP). Employment and income levels of the population are also important. Price changes and the volume of exports or imports are also influential.
How many phases in the business cycle are there?
Several phases of the business cycle can be identified. There is expansion, peak, contraction, and breakthrough. Factors such as GDP and interest rates can help determine the current phase of the business cycle stages. Total employment and consumer spending are also important elements.
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Expansion
This stage is marked by extremely high dynamics and growth in the value of GDP. Elements such as prices, production, investment, and demand increase. In addition, unemployment in the area is falling.
Peak
It is characterized by having the highest economic growth rate. The highest GDP and lowest unemployment are recorded. Economic boost reaches its maximum rate. An end follows, and most values stay at the same level. It usually creates imbalances in the economy that must be corrected later.
Contraction
The change comes at a time of economic shrinkage. This happens when economic growth slows, employment falls and prices stagnate. Business capital spending slows down, and demand, production, and prices fall.
Trough
The bottom phase is reached when the economic cycle hits its lowest point. This stage is characterized by the highest level of unemployment and the minimum value of GDP. The end of the sharp drop comes during the normalization of values. Click for more to learn what a recession is and how it can affect our lives.
How long does the cycle last?
The classic four-phase business cycle lasts about 8-10 years. Its length, however, depends on many things, including the structure of a given economy. Each part of the cycle is described by characteristic signs, which can be noted with the help of a business cycles graph.
What are the causes?
Economists list many reasons, responsible for the phases of business cycle changes. Among them are internal causes, resulting from imperfections in the economic mechanism and causing trouble in its functioning. External causes are shocks affecting demand and supply. If you are curious about how we can fight inflation, click here.
What are economic cycles divided into?
Short
Lasting 3-4 years, on average every 3.5 years. It is related to changes in stock prices and the settlement of banking operations.
Medium
Lasting 8-10 years. Related to changes in capital spending, GNP, inflation, and unemployment. To learn what inflation is and what its causes and example are, click here. Lasting 15-23 years, connected to growth in investment, construction, and migration.
Long
Lasting 40-60 years, related to discoveries or major technological innovations. This includes electricity, engines, computers, and the Internet, among others.
What impact does it have?
The stages of the business cycle are closely related to the growth of the economy. If you are interested in the best countries to open a business in, be sure to check what stage of the cycle the country is in. The intensity of processes in transition systems is larger than in highly developed countries. Business cycles stages in advanced countries are very much synchronized.
