What is business cycle?

The business cycle describes the more or less even sequence of the individual economic phases upswing, boom, downswing and low phase. The business cycle of an economy can be seen graphically as a kind of wave movement across the time axis, the highs and lows of which are sometimes more and sometimes less pronounced.

In this chapter we explain the course of the business cycle, the individual phases and their meaning. At the end of the lesson, practice questions are available with which you can check your newly acquired knowledge.

Synonyms: economic phases | Economic fluctuations

Why should you know the business cycle?

The economic situation and the development of an economy are illustrated using the business cycle. Since the cycle usually repeats itself over and over again, you can estimate the future course of the economic curve at least with regard to the current and thus also the following phase.

Course of the business cycle

The state of an economy at the current or at a historical point in time can be graphically represented on the basis of the business cycle. The individual phases of an economic cycle alternate and result in a more or less even wave movement. According to fun-wiki, the duration of a complete cycle can hardly be predicted, but is usually between four to eight years.

Economic phases:

  • Boom (expansion)
  • Boom
  • Downturn ( recession )
  • Low phase ( depression )

Phases of the business cycle

A business cycle consists of four successive phases. The order remains the same, but the duration of each individual phase can vary greatly. In the following, the individual economic phases will be briefly characterized on the basis of their essential properties.

Business cycle: phases of the business cycle

Boom (expansion)

The upswing (also known as the upswing phase ) is characterized by growing overall economic production. The unemployment decreases during this time and the capacity of the company are always better utilized. The prices rise only slightly during this time and the interest rates also remain at a comparatively low level. There is an optimistic mood in the economy.

business cycle

Boom

The boom, also known as the boom, represents the climax of the business cycle. During this time there is a strong demand for goods and services, the capacities of the companies are fully utilized and there is full employment in the labor market. At the same time there are wages and salaries of employees at a high level and continue to rise, what the risk of inflation increases. If the maximum of the economic curve is exceeded, the gross domestic product slowly declines again and initiates the downturn.

Downturn (recession)

During the downturn, economic activities within an economy decrease again. This is noticeable in the demand and consequently also in the production of goods and services. On the corporate side , profits fall and fewer investments are initiated. In the further course , unemployment rises. Interest rates and prices, which were initially at a high level, are now also falling.

Low phase (depression)

The business cycle bottomed out during the period of depression. This phase is characterized by high unemployment, sharply lower prices and low interest rates. Household incomes have reached a very low level and demand for consumer goods is falling accordingly. Companies also have low profits and low investment volumes.

 

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