What Is the Business Cycle?

The business cycle (economic cycle or trade cycle) is a permanent feature

of market economies. It can also be defined the downward and upward
fluctuations of gross domestic product (GDP) along its natural growth rate
over a long period of time. Those fluctuations are inconsistent and entail
the performance of governments, households, businesses, and even
nonprofit organizations.

Stages of a business cycle

Think of business cycles like the tides: a natural, never-ending ebb and
flow from high tide to low tide.  Throughout its life, a business cycle goes
through four identifiable stages, known as phases: expansion, peak,
contraction, and trough.

When will each stage happen?

- Expansion: Otherwise known as a ‘boom’ or economic growth. This
phase of the economic cycle occurs when aggregate demand is increasing.
In other words, the population as a whole is demanding more goods and
services and businesses are providing them.

- Peak: occurs when the expansion has reached its end and indicates that
production and prices have reached their limit. Employment levels remain
stable and the economy is reliant on productivity growth to stimulate
output. Business investment starts to stagnant as the growth of future
demand starts to diminish. Businesses will still continue to invest, but on a
nationwide scale, there is stagnation.

- Contraction: Once aggregate demand starts to fall, we enter into the

contraction phase. This is otherwise known as a recession, which we
associate with declining employment, business investment, and consumer
confidence.

- Trough: During this phase, the economy has suffered the worst of the
decline. Economic growth remains stagnant, with aggregate demand
failing to pick up.

When do you expect the economic situation to change? Why?

- These situations change over time along with the economic and business
cycles, as an economy goes through periods of expansion and contraction.
- Economic situations are considered to be positive when an economy is
expanding and are seen as negative when an economy is contracting
- A country's economic situations are influenced by numerous
macroeconomic and microeconomic factors, including monetary and fiscal
policy, the state of the global economy, unemployment levels,
productivity, exchange rates, inflation and many others.
Example: A once-in-a-century crisis unleashed by the COVID-19 pandemic
—hit the world economy in 2020. The pandemic reached every corner of
the world, infecting more than 90 million and, so far, has killed close to 2
million people worldwide. Governments around the world responded
rapidly to stem the health and economic contagion of the crisis. Fiscal and
monetary stimulus packages were quickly rolled out to save the economy.
The crisis responses, however, entailed difficult choices between saving
lives and saving livelihoods, between speed of delivery and efficiency, and
between short-term costs and long-term impacts.