The Phases Of The Business Cycle - Economic Growth And Stagnation

Over the years, we have been able to observe how the phases of the business cycle, their length, nomenclature, as well as their classification have changed. The division into smaller and larger cycles (crisis, depression, recovery, boom) has gone down in history, and the classic business cycle consists of two phases: decline (recession) and growth (expansion). Growth is positive, while recession is the opposite.

Economic growth

Economic growth is nothing more than the process of increasing the production of goods and services in a given country and over a certain period of time (e.g. per year). Economic growth includes those elements of the economy that we can measure (e.g. production, income, employment). The measures of economic growth are gross domestic product (GDP) and gross national product (GNP).

Economic growth does not guarantee that all citizens will benefit from it. It happens that some social groups fare better, while others are poorer. For this reason, GDP per capita (GDP per capita) is considered an important measure of economic growth. This indicator is calculated by dividing a country's GDP by its population.

Economists distinguish four driving forces of economic growth: labor supply, capital (physical, financial and human), natural resources and technology.

Stagnation

Simply put, stagnation is a state of the economy in which, in the long term, the volume of production, income of business entities, investment outlays and trade remain at a relatively constant, usually relatively low level, which is usually accompanied by a high level of unemployment. Stagnation may concern the entire economy as well as one indicator (e.g. investments, exports, demand, consumption). This term characterizes an economy in which, first of all, the rate of growth slowed down, and only as a consequence an increase in unemployment. It is characterized by a low level of prices and general economic activity.

Economic stagnation - what does it mean?

The concept of economic stagnation is understood as a weakening of the pace of development or even a lack of economic growth. It is a situation in which in a given economy an increase in the number of unemployed people can be observed, a decrease in the level of consumption and a decrease in the capital that companies invest in the development of their activities.

This state of affairs is also a serious burden for the public sector. The decline in business activity translates into layoffs. This means that the state must allocate more resources to unemployment benefits and other forms of assistance during the economic downturn.

Stagflation

Stagflation is a macroeconomic phenomenon that describes the occurrence of inflation and economic stagnation at the same time. Then we are dealing with high inflation and low growth and/or economic slowdown. In addition, stagflation occurs when the economy is in recession and the cost of living continues to rise. All this, however, has a negative impact on the life of society.

Causes

One of the main causes of stagflation is a negative supply shock. It causes an increase in prices on the market and a reduction in raw materials, which in turn causes an economic crisis. Stagflation may also be caused by a break in supply chains, lack of energy resources, and thus a sharp increase in their prices.

What are the effects of stagflation?

Stagflation is considered by economists to be a highly negative economic phenomenon. Its effect is primarily an increase in unemployment in the country, a reduction in the production of raw materials, a general increase in prices, and as a result, a decrease in the value of the national currency.

Source: Begg D., Fischer S., Dornbusch R. (1997) Ekonomia. Makroekonomia