Business Cycle

The business cycle in economics

What is a Business cycle?

When the Gross Domestic Product (GDP) fluctuates around its long-term natural growth rate, it is said to be in a business cycle. It shows how an economy changes through time, expanding and contracting in terms of economic activity. When a business cycle experiences a single expansion followed by a single contraction, it is said to be complete. The duration of the business cycle is the amount of time needed to complete this sequence. A recession is characterised by a time of relatively stagnant economic growth, whereas a boom is characterised by a period of strong economic expansion. These are calculated using the real GDP growth, which has been corrected for inflation.

What are the stages of a business cycle?

The steady growth line is represented by the middle straight line in the accompanying diagram. The business cycle moves in a circular motion. A more thorough explanation of each step of the business cycle may be found below:


Expansion is the first phase of the business cycle. Positive economic indicators like employment, income, output, wages, profits, demand, and supply of products and services are on the rise during this stage. Debtors typically pay their obligations on time, money is being created quickly, and investment is growing. As long as the economy is expanding favourably, this process continues.


 The second stage of the business cycle—a saturation point or peak—is then reached by the economy. The growth limit has been reached. The economic indices are at their greatest point and are not growing any further. Prices are at an all-time high. This phase represents the point at which the tendency of economic expansion reverses. At this time, consumers frequently rearrange their budgets.


The phase that follows the peak phase is known as the recession. In this stage, the demand for products and services starts to fall off quickly and consistently. A condition of surplus supply on the market results from producers continuing to produce despite a drop in demand. Prices usually decrease. As a result, all favourable economic indices such as income, output, wages, etc., begin to decline.


The unemployment rate has increased correspondingly. Be the economy’s growth slows down and drops below the steady growth line, the situation is referred to as a depression.


The economy’s growth rate declines during the depression phase. Up until the demand and supply for products and services, as well as the prices of the factors, reach their lowest point, there is still further decrease. Eventually, the economy sinks to its lowest point. It is an economy’s point of negative saturation. The national income and spending have both significantly decreased.


The economy enters the stage of recovery after the trough. In this stage, the economy turns around and starts to recover from its negative growth rate. Due to the low pricing, demand begins to soar, and supply follows suit. The populace starts to view investments and employment favourably, and production starts to rise. Employment starts to increase, and lending also shows signs of improvement because bankers have accumulated cash balances. Depreciated capital is replaced during this phase, which results in fresh investments in the manufacturing process. Up until the economy resumes levels of consistent growth, recovery will continue.

So these were the various stages of the business cycle in an economy. While self preparation may sound like a good idea, good coaching can help you pick up pace and get your way ahead of other aspirants when it comes to such complex topics in Economics. While going to a coaching can be a task, an online coaching can be something you must consider if you want to crack these exams as a good coaching will guide you in the right direction and provide you with all the tools you need to crack these exams.  So if you’re ready to crack these exams and build a successful career in Economics then register with Ecoholics,  the one-stop destination for all your learning needs. Study economics the smart way and get an in-depth understanding of this dynamic subject with our holistic approach. Our team of expert faculties help you polish your knowledge and provide you with one-on-one mentorship and doubt-clearing sessions, so you leave no stone unturned when it comes to your preparation. By signing up with us, you can access our live classes, video lectures, test series and get the hard copy of study material delivered to your doorstep, so your preparation never hits a bump!

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