Economic Cycle

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rjonesx
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Definition

The business cycle, also known as the economic cycle or trade cycle, is the downward and upward movement of gross domestic product around its long-term growth trend. The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth, and periods of relative stagnation or decline.

Economic Cycle

What is the ‘Economic Cycle’

The economic cycle is the natural fluctuation of the economy between periods of expansion (growth) and contraction (recession). Factors such as gross domestic product (GDP), interest rates, levels of employment and consumer spending can help to determine the current stage of the economic cycle. During times of expansion, investors seek to purchase companies in technology, capital goods and basic energy, and during times of contraction, investors look to purchase companies such as utilities, financials and healthcare .

Explaining ‘Economic Cycle’

An economic cycle, also referred to as the business cycle, has four stages: expansion, peak, contraction and trough. During the expansion phase, the economy experiences relatively rapid growth, interest rates tend to be low, production increases and inflationary pressures build. The peak of a cycle is reached when growth reaches its maximum output. Peak growth typically creates some imbalances in the economy that need to be corrected. This correction occurs through a period of contraction when growth slows, employment falls and prices stagnate. The trough of the cycle is reached when the economy hits a low point in growth from which a recovery can begin.

Economic Cycle Length

The National Bureau of Economic Research (NBER) is the definitive source of setting official dates for U.S. economic cycles. Measured by changes in gross domestic product, or GDP, NBER measures the length of economic cycles from trough to trough, or peak to peak. From the 1950s to present day, U.S. economic cycles have lasted about 5 and a half years. However, there is wide variation in the length of cycles, ranging from just 18 months during the peak to peak cycle in 1981-1982, up to 10 years from 1991 to 2001.

What Causes the Cycle?

This wide variation in cycle length dispels the myth that economic cycles can die of old age. However, there is some debate as to what causes cycles to exist in the first place. The monetarist school of economic thought ties the economic cycle to the credit cycle. Changes in interest rates can reduce or induce economic activity by making borrowing to households, businesses and the government more or less expensive. The Keynesian approach argues that changes in aggregate demand, spurred by inherent instability and volatility in investment demand, is responsible for generating cycles. Adding to the complexity of interpreting business cycles, other famed economists, such as Irving Fisher, argued that there no such thing as equilibrium and therefore, cycles exist because the economy naturally shifts across a range of disequilibrium as producers constantly over- or under-invest and over- or under-produce as they try to match ever-changing consumer demands.

Economic Cycle FAQ

What are the 4 stages of the economic cycle?

The main stages of an economic cycle include expansion, peak, contraction, and trough. The expansion stage is characterized by relatively rapid growth, generally lower interest rates, and an increase in employment. The peak is the stage that growth is at the highest point and is followed by contraction as the economy declines. The trough stage is the time in which the decline stops.

What stage of the economic cycle is the US in?

Leading up to the COVID-19 pandemic, the US was in a stage of expansion. In the midst of the pandemic, the US is experiencing a recession or economic contraction.

How many years is an economic cycle?

There is a wide range of variation in the duration of economic cycles. Since the 1950s, the average length of an economic cycle is about five and a half years.

How do you explain the business cycle?

The business cycle, or economic cycle, is the fluctuation of the economy between stages of growth and recession.

What are the economic stages?

The four stages of the economic cycle are expansion, peak, contraction, and trough.

What are the two types of business cycles?

The classical cycle refers to the upward and downward fluctuations in total production. The growth cycle, on the other hand, concerns the fluctuation in the growth rate of production.

What are the 2 main phases of economic cycles?

The most important phases of the economic cycle are prosperity and depression. The other phases are expansion, peak, trough, and recovery.

Further Reading

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