The Business Cycle In Simple Words

The business cycle is a phenomenon that is extremely important, because the appropriate identification of the phase in which the economy is located allows you to take appropriate action.

Definition

The business cycle is a phenomenon that occurs in a country over a longer period of time. It consists in fluctuations of economic measures recorded on the basis of the rising trend curve of economic growth.

This is historical data that shows that there was some kind of fluctuation before the growth ended. It is important, first of all, that these fluctuations occur while economic growth continues. It is worth emphasizing that business cycles follow each other. A decline in GDP growth means that after some time there will be a rebound. A perfect example was the recent discussion of economists who, after the economies slowed down, tried to guess in what form the economic recovery would take place.

It is worth emphasizing that the individual phases of the business cycle do not have a clearly defined duration in advance. History shows that both recession and prosperity have different lengths. In addition, they differ depending on the specific area. It is not uncommon for one country to flourish while another is in crisis.

Types of phases

Each business cycle consists of different types of phases. They are, of course, called - phases. Economists basically distinguish four main phases that follow one another:

• revival - the first phase, which is characterized by high dynamics, an increase in the GDP growth rate and a decrease in unemployment in a given area
• peak - this is the second phase of the cycle, which is characterized by the achievement of the highest possible level of recovery, and GDP is at this moment the highest
• crisis - the third phase of the business cycle is characterized by a decrease in GDP, growing unemployment, lower investment expenditures of companies, as well as an increase in prices
• bottom - this is the last phase of the cycle, which is characterized by the highest increase in unemployment, and the lowest GDP growth rate. This is a moment of crisis for the economy. At this point, it often happens that the Monetary Policy Council decides to lower interest rates in order to revive the economy

The names of the individual phases are not fully defined, so in the economic literature you can find other terms such as: overheating (vs peak), slowdown (vs crisis), as well as recession (vs bottom).

Background

The business cycle had its beginning in countries characterized by the most developed capitalist system. First it appeared in England, and only later it made its way to the USA. In the United States, it was initially associated only with agriculture. The described business cycles appeared there only after the civil war as a result of strong industrialization.

Currently, this phenomenon affects all types of non-isolated economies around the world.

Causes of economic fluctuations

• propensity to save and hoard
• reduced consumer demand
• use of inventions
• excessive increase in generation capacity during the recovery period
• use of multipliers, accelerators
• expectations of consumers and entrepreneurs

How to determine the phase of the cycle?

Economists point out that it is difficult to clearly define a cycle. Research shows that no two business cycles have ever been the same. Each of them, despite the fact that it could be characterized by similar macroeconomic indicators, proceeded differently, and sometimes had completely different background and characteristics. They also differed in their causes and duration, as well as in their size.

It turns out that there are many economic measures that make it possible to clearly determine in which phase of the economic cycle a given economy is. When determining the cycle, the following factors are taken into account: such data as: employment level, capital expenditures, GDP dynamics, inflation level, changes in the income of the population, stock indexes

They provide invaluable data on the situation in the economy. Many of them, such as unemployment rate, industrial production, inflation - are published monthly.

Clearly determining which phase of the cycle the economy is in is not so simple. There is no single clear indicator that the economy will soon be in recession, or vice versa - booming. One of the most important determinants is the rate of economic growth. If it is high and grows from quarter to quarter, with falling unemployment and increasing investment, then we can talk about a phase of economic recovery. If it falls from quarter to quarter, we are talking about a slowdown, and finally a crisis. In technical terms, a recession is defined as a fall in GDP for at least two consecutive quarters. Many economists also believe that we are dealing with a recession when we observe an increase in unemployment by 1.5% in 12 months

Source: Schumpeter, J. A. „The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle”