The economic phases represent the current situation of the overall economic situation based on the level of the real gross domestic product. A distinction is made between the four phases of upswing, boom, downswing and low phase. The change in economic phases is shown as a graphic, characterized by a wave-like change over time.
In this lesson we introduce the individual economic phases and explain their meaning to you. Finally, we offer you practice questions that you can use to check your knowledge.
Synonyms: Business Cycles | Economic fluctuations
Why are the economic phases important?
The economic phases illustrate the development of the real gross domestic product and thus reflect the economic development of a country. In order to be able to assess and examine the overall economic situation, it is essential to know the individual economic phases.
The economic phases
According to deluxesurveillance, the business cycle is divided into several phases, which are discussed in more detail below. The length of time that a complete business cycle takes depends primarily on the level of economic activity.
Boom (expansion)
The phase of economic upswing is also known as the expansion phase. In practice, it is characterized by an increasing number of orders and an associated increase in production. The capacities are better utilized and private investments are increasing due to the higher wage bill of the households.
In addition, the unemployment rate is falling, prices are rising slightly and, in addition to low interest rates with an upward trend, there are optimistic forecasts with regard to further developments.
Boom
The boom includes the upper turning point of the economic curve. This phase, known as the boom, is characterized by strong demand, which leads to full utilization of all capacities. In this phase there is usually full employment with rising wages, rising prices and rising interest rates.
Although the gross domestic product continues to increase at this point in the economy, the growth rates are falling. At this point, a further increase in real national income is no longer possible and production is driven up until the so-called overheating of the market occurs.
This overheating is characterized by increased demand for credit and the increasing number of bad investments that can be traced back to overly optimistic expectations. The higher demand for loans is also causing interest rates to rise significantly, which is becoming a problem for more and more companies.
In the course of this overheating, one speaks of a saturated market, which is characterized by the following properties:
- Stagnation or contraction in individual sub-markets
- Only a small increase in market volume
- Price drop
- The number of concentration and consolidation processes is increasing
- Oligopolistic structures are increasingly replacing polypolistic market structures
- Small and less productive companies are disappearing from the market
Downturn (recession)
Basically, the downturn phase already begins during the boom after the maximum has been exceeded. An economic downturn is now being recorded for the first time during the recession. By definition, however, the downturn phase only occurs when there is no more growth in two consecutive quarters or when the gross domestic product falls.
The recession is characterized by the following features:
- Declining gross domestic product
- Decline in demand
- Forecasts are becoming increasingly pessimistic
- Camps are overcrowded
- Increased short-time work and overtime reduction in companies
- Decline in investment
- Prices, wages and interest rates stagnate or decrease
Low phase (depression)
The last phase of the economy is the depression, the low point of an economy. There is no uniform definition of this in the literature.
However, there are also various features here that indicate a low phase. These include:
- High unemployment
- Bad utilization of capacities
- Investments only to a very limited extent
- Liquidity bottlenecks in companies
- Private consumption is reduced to a minimum
Once the depression is over and a recovery is on the horizon, the business cycle begins again with an upswing. It should be noted, however, that the time periods can vary greatly from one another. Downswing phases usually last significantly longer than upswing phases.