ECONOMIC CYCLE
1. Introduction. The economic cycle, also known as the business cycle,
refers to the natural fluctuation of economic activity in an economy over time.
The term " economic cycle" (or business cycle or boom-bust cycle) refers to
economy-wide fluctuations in production of goods and services, trade and
overall economic activity. The economic cycle is the upward and downward
movements of levels of GDP (gross domestic product) and refers to the period of
expansions and contractions in the level of economic activities (business
fluctuations) around a long-term growth trend.
2. Phases of Economic Cycle. There are four main phases of the
economic cycle. The phases of a business cycle follow a wave-like pattern over
time, with expansion leading to a peak and
then followed by contraction.
a. Expansion. This is the phase
where the economy is growing
and there is an increase in
economic activity. During this
phase, businesses are
investing, employment is
growing, consumer confidence is high and the overall level of
economic output is increasing. 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. Debtors
are generally paying their debts on time, the velocity of the money supply
is high and investments are high. This process continues as long as
economic conditions are favorable for expansion. This phase can be
characterized by:-
(1) Low unemployment rates.
(2) High levels of consumer spending.
(3) Rise in the stock markets.
b. Peak. This is the highest point of the economic cycle, where the
economy has reached its maximum level of growth and is producing at
maximum allowable output. The economy reaches a saturation point, or
peak and maximum limit of growth is attained. The economic
indicators do not grow further and are at their highest. Prices are at
their peak. Employment is at or above full employment and inflationary
pressures on prices are evident. This stage said to be "overheated. This
stage marks the reversal point in the trend of economic growth.
Consumers tend to restructure their budgets at this point. After this point,
economic activity slows down, and there is a decrease in the rate of
expansion. This phase is characterized by:-
(1) High levels of inflation.
(2) Increased borrowing costs.
(3) Decrease in consumer confidence.
c. Contraction. Following a peak, the economy typically enters into a
correction which is characterized by a contraction where growth
slows, employment declines (unemployment increases) and pricing
pressures subside. This phase is characterized by:-
(1) Decline in economic activity.
(2) Businesses may reduce their investments.
(3) Decrease in employment.
(4) Consumer confidence begins to decline.
(5) Rising unemployment rates.
(6) Decreased consumer spending.
(7) Decrease in the stock market.
d. Trough. This is the lowest point of the economic cycle, where the
economy has reached its lowest level of growth. At this point, economic
activity begins to pick up again and the expansion phase starts again. The
slowing ceases at the trough and at this point the economy has hit a
bottom from which the next phase of expansion and contraction will
emerge. This phase can be characterized by:-
(1) Lower interest rates.
(2) Increased government spending.
(3) Increase in consumer and business confidence.
3. Conclusion. These phases of the economic cycle can vary in length and
intensity and the timing of each phase can be influenced by various factors, such as
government policies, international trade, and natural disasters. Understanding
the phases of the economic cycle can help individuals and businesses make better
decisions about investments, hiring, and overall financial planning.
