Business cycle, also known as the economic cycle, is the natural increase and fall of economic growth that occurs over time. In short, a business cycle occurs due to the fluctuations that an economy experiences over time as a result of changes in economic growth.
Economists strive to observe where the economy is located and, more importantly, where it is headed to deal with potentially adverse future economic events. At the moment when the economy is heading in an undesirable direction, economists can apply monetary or fiscal policy instruments to change the course of the economy.
The Four Stages of Business cycle:
While there are no two equal business cycles, they can be distinguished as a grouping of four stages that were ordered and contemplated in their most current sense by the American economists Arthur Burns and Wesley Mitchell in their text Measuring Business Cycles. The four essential periods of the business cycle include:
An acceleration in the pace of the economic movement characterized by high development, low unemployment and rising prices. The GDP growth rate is in the healthy range of 2-3 percent. Unemployment reaches its natural rate of 4.5 to 5.0 percent. The period established from minimum to maximum.
The upper turn of an economic cycle and the moment in which development becomes a contraction.
A slowdown in the pace of economic activity characterized by low or rancid development, high unemployment and low prices. It is the period from peak to valley. Economic growth weakens. GDP growth falls below 2 percent.
When it becomes negative, that is what economists call a recession. The unemployment rate begins to rise. It does not occur until the end of the contraction phase because it is a lagging indicator. Companies expect to hire new workers until they are sure that the recession is over.
The less defining moment of an economic cycle in which a contraction becomes an expansion. This defining moment is also called Recovery.
The four phases of the economic cycle can be so severe that they are also called the boom and bust cycle
The National Bureau Economic Research determines the stages of the economic cycle using quarterly GDP growth rates. It also uses monthly economic indicators, such as real personal income, employment, industrial production and retail sales. It takes time to examine these data, so the NBER does not inform you of the phase until after it has begun.
Who Manages The Business Cycle?
The government manages the business cycle. Lawmakers use fiscal policy to influence the economy. They use an expansive fiscal policy when they want to end a recession. They must use fiscal policy to prevent the economy from overheating. But that rarely happens.
The nation’s central bank uses monetary policy. Reduce interest rates to end a contraction or depression. That is called expansive monetary policy. The central bank increases the rates to administer an expansion, so it does not reach its peak. That is a contractive monetary policy. The objective of economic policy is to maintain the growth of the economy at a sustainable pace. It must be strong enough to create jobs for all who want, but slow enough to avoid inflation.
Three factors cause each phase of the business cycle. These are the forces of supply and demand, the availability of capital and consumer confidence. The most critical is the confidence in the future. The economy grows when there is faith in the future and in the legislators. It does the opposite when confidence decreases.