The Gross Domestic Product (GDP), which is the total value of goods and services produced in a country, keeps fluctuating over time due to expansion and contraction in economic activity. This experience of expansion and contraction in an economy from time to time is known as the business cycle. A business cycle is completed when it goes through a single boom and a single contraction in sequence.
As we saw, no business in any economy has a straight trajectory. They all have periods of economic expansion and periods of contraction from time to time. There are no set causes for business cycles as well. Business cycles may be caused due to irregular innovation, changes in productivity, monetary factors, and financial instability. External factors may include global economic conditions, political events like war or elections, and natural disasters. They do not have any uniformity.
Business cycles are a very complex and dynamic phenomenon and do not occur for specific times, their periods will vary according to the industries and the economic conditions. Their duration may vary between two to ten or even twelve years. The time period to complete this sequence is called the business cycle length. Even the intensity of the phases will be different. So it is nearly impossible to predict or prepare for these business cycles.
Trade cycles are globally interconnected. They do not limit themselves to one industry or country. Once they start in one country they will spread to other countries and economies via trade relations and international trade practices. Generally, oil exports, forex regimes, monetary policies, and interconnected countries’ financial and political environment are major factors driving volatility transmission in global business cycles. Political turmoil, natural disasters, and war are some of the other events that can have a deep effect on international business.
The business cycle goes through four major phases: expansion (or Boom), peak, contraction, and trough.
Expansion or Boom: The first step of a new business cycle is expansion. In this stage, there is an increase in positive economic indicators such as employment, income, output, wages, profits, demand, and supply of goods and services, and payment of debts on time. During the expansion phase, the economy experiences relatively rapid growth, interest rates tend to be low, and production increases.
Peak: The peak of a cycle is when growth hits the highest point of all the phases of business cycles. Prices are at their peak. In this phase, the positive economic indicators have reached such a point that they will not grow further. This stage can be marked as the reversal point in the trend of economic growth.
Contraction: The downward slope of the business cycle is called economic contraction. The demand for goods and services starts declining rapidly and steadily in this phase. Usually, the producers do not notice the decrease in demand instantly and go on to produce, creating excess supply in the market. Prices tend to fall.
Trough:
The business cycle is the upward and downward movement of gross domestic product (GDP) and consists of recessions and expansions that end in peaks and troughs. Trough refers to a stage in the business cycle where activity is bottoming or prices are bottoming before a rise. All positive economic indicators such as income, output, wages, etc., fall. There is further decline until the prices of factors and the demand and supply of goods and services contract to reach their lowest point. The economy eventually reaches the trough. It is the negative saturation point for an economy.
