The Business Cycle

The term “business cycle” (or economic cycle or boom-bust cycle) refers to economy-
wide fluctuations in production, trade, and general economic activity. From a conceptual
perspective, the business cycle is the upward and downward movements of levels of
GDP (gross domestic product) and refers to the period of expansions and contractions
in the level of economic activities (business fluctuations) around a long-term growth
trend.

Business Cycle Phases

Business cycles are identified as having four distinct phases: expansion, peak,
contraction, and trough.

An expansion is characterized by increasing employment, economic growth, and

upward pressure on prices. A peak is the highest point of the business cycle, when the
economy is producing at maximum allowable output, employment is at or above full
employment, and inflationary pressures on prices are evident. Following a peak, the
economy typically enters into a correction which is characterized by
a contraction where growth slows, employment declines (unemployment increases),
and pricing pressures subside.  The slowing ceases at the trough and at this point the
economy has hit a bottom from which the next phase of expansion and contraction will
emerge.

Four phases of the business cycle

There are four distinct phases in the business cycle:

Expansion

Expansion refers to the increase in economic factors such as income, supply and
demand. During this stage, there is an increase in consumer confidence. As a result,
people spend more money and pay their debts more comfortably. Many companies
grow and thrive in this stage.

Peak

The peak phase follows the expansion in a business cycle. The peak of the business
cycle is the instance right before key economic indicators start to fall. At this time, prices
are at their highest, and the economy can "overheat," meaning businesses can no
longer satisfy consumer demands.
Contraction

The contraction phase follows the peak stage. The business cycle's contraction stage
results from businesses decreasing and regulating from the previous peak. During this
stage, business owners focus on finding ways to improve their financial situation, such
as how they can save money or become more competitive.

Trough

The trough phase follows the contraction phase and ends before another expansion
phase. During this stage, supply and demand decline significantly, and employees do
not have nearly as many materials. It's common for companies to lay off employees or
close in the trough phase.