What are business cycles

Updated: Feb 22

Business cycles describe how national output changes over a period of time


There are 5 phases in a business/economic cycle


  1. Growth

  2. Boom

  3. Recession

  4. Slump, and

  5. Recovery


Growth


During this phase, the economy grows rapidly as demand increases production and output (GDP). This increases employment, resulting in higher income. There will be more businesses starting up during this phase, encouraging competition.


Boom


This is the phase where the economy achieves its peak in growth and starts to decline. At this phase, governments may start to increase interest rates to reduce pressure on inflation. Firms tend to earn the highest profit at this phase, and may increase their retained profits.


Recession


As business activities start to decline due to declining sales (demand) during this phase, there will be less business growth and lower output. Profit will reduce, interest rates would be higher, encouraging savings, reducing loan financing. Unemployment rate may increase as some businesses may start to downsize its operations, resulting in redundancies.


Slump


A slump would be at the phase where the government will stimulate the economy by increasing expenditure, reducing interest rates and taxes. Gradually the economy will start to take a turn for the better as more jobs will be created from increasing demand arising from increased government expenditure.


Recovery


During this phase, businesses starts to pick-up gradually from increasing demand due to higher employment, before it enters the growth phases.


Government uses fiscal (tax, expenditure) and monetary policies (interest rates) to meet economic objectives at every phase of the business cycle.