The business cycle is the fluctuation in economic activity that an economy experiences over a period of time. A business cycle is basically defined in terms of periods of expansion or recession. During expansions, the economy is growing in real terms (i.e. excluding inflation), as evidenced by increases in indicators like employment, industrial production, sales and personal incomes. During recessions, the economy is contracting, as measured by decreases in the above indicators. Expansion is measured from the trough (or bottom) of the previous business cycle to the peak of the current cycle, while recession is measured from the peak to the trough. In the United States, the National Bureau of Economic Research (NBER) determines the official dates for business cycles.
The Phases of the Business Cycle
While no two business cycles are exactly the same, they can be identified as a sequence of four phases that were classified and studied in their most modern sense by American economists Arthur Burns and Wesley Mitchell in their text Measuring Business Cycles. The four primary phases of the business cycle include:
- 1. Expansion: A speedup in the pace of economic activity defined by high growth, low unemployment, and increasing prices. The period marked from trough to peak.
- 2. Peak: The upper turning point of a business cycle and the point at which expansion turns into contraction.
- 3. Contraction: A slowdown in the pace of economic activity defined by low or stagnant growth, high unemployment, and declining prices. It is the period from peak to trough.
- 4. Trough: The lowest turning point of a business cycle in which a contraction turns into an expansion. This turning point is also called Recovery.
These four phases also make up what is known as the "boom-and-bust" cycles, which are characterized as business cycles in which the periods of expansion are swift and the subsequent contraction is steep and severe.
source: Rock Education