Reviewed by Aug 27, 2020| Updated on
A business cycle refers to various stages of rising and fall in the economy. A business cycle is also known as an economic cycle or trade cycle. The various stages in a business cycle reflect the fluctuations in economic activity that an economy undergoes typically in a long period.
Stages in a Business Cycle
A business cycle generally lasts for 5 ½ years. The various stages in the business cycle are:
1. Expansion: Expansion is the first stage in a new business cycle. A phase of expansion reflects an increase in income, employment, production, and sales. Money flows into the economy more easily, and it is a boom period for investments. People take on debt and repay the same in time.
2. Peak: The second stage is the 'Peak' stage when all the economic indicators are at their peak stage of growth. At this stage, the economy is said to peak out. Prices hit their highest level after which the economy stops growing. At this stage, people and enterprises restructure their businesses as the economy peaks out and reverse the growth trend.
3. Recession: The stage of contraction of the economy is called a recession. In this stage, there is a slowdown in production and low growth in sales and income. There may be a decline or negative growth in sales and consequent unemployment.
4. Depression: The growth continues to decline with an increase in unemployment. Industrial production shows a decline, business enterprises and consumers are unable to secure funds on credit. A reduction in business can also lead to bankruptcies. The period is also marked by low business and consumer confidence.
5. Trough: Trough is the end of the depression stage leading to the path of recovery.
6. Recovery: Recovery is the stage of a turnaround of the economy. The prices are low due to the earlier phase of depression. The low prices generally lead to an increase in demand for goods, augmenting production leading to a revival in industrial production. As a result, there is a growth in credit. There is a consequent increase in employment and incomes too.
In a business cycle, the 'Expansion' is measured from the trough (or bottom) of the earlier business cycle to the peak of the current cycle. A recession is measured from the peak of the current cycle to the trough of the next cycle.