Business cycle

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Business Cycle

The Business Cycle (pronounced: /ˈbɪznɪs ˈsaɪkəl/), also known as the economic cycle or trade cycle, is a term used to describe the fluctuations in economic activity that an economy experiences over a period of time. The concept of the business cycle has been a central focus of economic research and policy for over a century.

Etymology

The term "Business Cycle" is derived from the concept of cycles in nature and physical sciences. The term was first used in the early 19th century to describe the boom and bust cycles that were observed in the economy.

Definition

A Business Cycle is characterized by expansion and contraction in economic activity. It consists of periods of economic growth and periods of economic decline. During the expansion phase, there is an increase in various economic factors, such as employment, income, production, and sales. During the contraction phase, these factors decline.

Phases of Business Cycle

The business cycle is divided into four phases:

  1. Expansion - This is the period from the trough (or bottom) of the previous business cycle to the peak of the current cycle, during which the economy is in an upswing.
  2. Peak - This is the phase where the economy hits a snag, having reached the maximum level of growth. After the peak point is reached, the rate of growth slows down.
  3. Contraction - This is a period of declining real income and output. This phase continues until the economy hits a trough.
  4. Trough - This is the phase where the decline of the economy has halted and it has hit rock bottom.

Related Terms

  • Recession - A significant decline in economic activity spread across the economy, lasting more than a few months.
  • Depression - A severe and prolonged downturn in economic activity, characterized by a long-term decline in economic output and employment.
  • Recovery - The phase of the business cycle following a recession, during which an economy regains and exceeds peak employment and output levels achieved prior to downturn.
  • Boom - A period of rapid economic expansion resulting in higher GDP, lower unemployment and rising asset prices.

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