The economic cycle, also known as the business cycle, refers to the fluctuations in economic activity that occur over time. It is characterized by four stages: expansion, peak, contraction, and trough. The duration of each stage can vary, and the cycle can last anywhere from a few months to several years.
During the expansion stage, the economy experiences relatively rapid growth, interest rates tend to be low, and production increases. The economic indicators associated with growth, such as employment and wages, corporate profits and output, aggregate demand, and the supply of goods and services, tend to show sustained uptrends through the expansionary stage. The flow of money through the economy remains healthy and the cost of money is cheap. However, the increase in the money supply may spur inflation during the economic growth phase.
The peak of a cycle is when growth hits its maximum rate. Prices and economic indicators may stabilize for a short period before reversing to the downside. Peak growth typically creates some imbalances in the economy that need to be corrected. As a result, businesses may start to reevaluate their budgets and spending when they believe that the economic cycle has reached its peak.
A contraction occurs when growth slows, employment falls, and prices stagnate. As demand decreases, businesses may not immediately adjust production levels, leading to oversaturated markets with surplus supply and a downward movement in prices. If the contraction continues, the recessionary environment may spiral into a depression.
The trough of the cycle is reached when the economy hits a low point, with supply and demand hitting bottom before recovery. The low point in the cycle represents a painful moment for the economy, with a widespread negative impact from stagnating spending and income.
The causes of the economic cycle are highly debated among different schools of economics. Some economists believe that the cycle is caused by external factors such as wars, natural disasters, and political instability, while others argue that it is caused by internal factors such as technological innovation, monetary policy, and fiscal policy.
A Countries Economic Cycle By Means Of A Diagram image
