The Business Cycle

The business cycle, also known as the economic cycle, is the upward and downward movement of gross domestic product (GDP) around its long-term growth trend. The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth (an expansion or boom), and periods of relative stagnation or decline (a contraction or recession).

Stages of the Business Cycle

There are four stages to the business cycle: recession, growth, boom, and slump/depression.

1. Recession

A recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

Examples of a Recession:

• The Global Recession (2008-2009): This recession was caused by a combination of factors, including the collapse of the US housing bubble, the subprime mortgage crisis, and the global credit crunch.

2. (Economic) Growth

Economic growth is an increase in the production of goods and services in an economy over a period of time.

Examples of Economic Growth:

• The "Roaring Twenties" (1920s): Following World War I, the United States experienced a period of rapid economic expansion fueled by technological advancements, mass production, and consumerism.

3. Boom

A boom is a period of rapid economic expansion, characterized by high levels of investment, consumer spending, and employment.

Examples of a Boom:

• The Dot-Com Bubble (late 1990s): Fueled by rapid technological advancements and the rise of the internet, the dot-com bubble saw a surge in technology stocks and investment in internet-based companies.

4. Slump/Depression

A slump, or depression, is a severe and prolonged recession. It is characterized by a sustained decline in economic activity, high unemployment, and falling prices (deflation).

Examples of a Slump/Depression:

• The Great Depression (1929-1939): This was the most severe economic downturn in modern history, triggered by the Wall Street Crash of 1929, it led to widespread unemployment, bank failures, and a decline in global trade.

Conclusion

The business cycle is a natural part of the economy. By understanding the different stages of the business cycle, businesses and governments can make more informed decisions about investment, spending, and economic policy. While predicting the exact timing and duration of each stage is challenging, understanding these cyclical patterns can guide policymakers and businesses in making informed decisions.

Source:

"Business Cycle." Investopedia. Accessed 2023.