Company life cycle An economy's natural cycle of expansion and contraction

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Dated as of May 7th, 2022

How Do Business Cycles Work?

The "business cycle" describes the periodic increase and decline of the gross domestic product (GDP)
around its long-term natural growth rate. This principle explains why any given economy will expand,
then contract, over time.

Diagrammatic Representation of the Business Cycle

When a period of economic growth is followed by a period of contraction, one full cycle has occurred.
The period required for this trend to repeat itself is known as the duration of a business cycle. A boom is
a time of rapid economic development, while a recession is a period of slow or negative growth. The
rate of inflation-adjusted GDP growth is used to assess these factors.

Advance through the Phases of the Business Cycle

In the above graph, a steady growth rate is depicted by the centre line. Several years go by in a business
cycle. See below for a detailed examination of each stage of the business cycle.

becoming larger
Initial stages of a company's life cycle are marked by rapid expansion. In this stage of economic
development, a variety of economic indicators, including but not limited to employment, income,
production, wages, profits, demand, and supply, are all on the upswing. Debtors' late payments are
uncommon, the velocity of the money supply is strong, and investment levels are high. To the extent
that the economy remains robust, this process will continue.

2. Peak

The peaking phase, the second stage of the economic cycle, occurs when the economy is performing at
its highest level. The ceiling of possible growth has been reached. The leading indicators for the
economy have reached a maximum and have levelled off. There is no more room to increase prices. The
increasing trend in the economy has started to weaken. At this time of year, many people review their
budgets.

Stagnation in economic activity

In the wake of the zenith, the trough sets in. Consumption needs fall precipitously and steadily
throughout this phase. Producers keep pumping out items despite the declining demand, resulting to an
oversupply. It's common for pricing to go down. As a direct result, economic indicators including income,
output, wages, and others start to fall.

Anxiety and Depression

The unemployment rate has increased correspondingly. In a depression, economic growth continues to
fall below the steady growth line.

Trough 5.
During a depression, an economy's growth rate falls below zero. The market declines further until factor
prices, together with the demand and supply for goods and services, reach their equilibrium point. The
economy is now predicted to be at trough. When this happens, the economy starts to shrink. A major
portion of national funds are being used up.

Sixth, a resurgence

After hitting bottom, the economy is now in the recovery phase. The economy has bottomed out, and
growth has begun to turn positive. More people want to buy it since it's so inexpensive, so producers
make more of it. As a result of a shift in public sentiment toward investment and employment,
production is on the increase.

Increases in banks' reserves coincide with improving indicators of the labour market and the credit
sector. This phase involves the replacement of depreciated capital with new outlays for production. The
economy will keep gaining ground until it resumes normal growth.
There has been one entire cycle of economic growth and decline. The two ends of the spectrum are
depicted by the high and low points.

Expert Opinions in Economics

John Maynard Keynes postulated that economies go through cycles whenever there is a deviation from
full employment due to fluctuations in aggregate demand.