Business Cycles

Civics & Economics; by Kristin Casey

Our economy

Our economy goes through various phases of the business cycle. The cycle alternates but does not always following each phase, one after the other.

The four phases of the business cycle are:

1) Prosperity/Peak
2) Recession/Contraction
3) Depression/Trough
4) Recovery/Expansion

The following economic ratings are used to gauge changes in the economy:

GDP - Gross Domestic Product - The total value of all final goods and services produced within a country in a given year per capital GDP - The average amount of money that has been added to a country's economy per person as the result of the production of goods and services in a given year. CPI - Consumer Price Index - A measure of the average price of consumer goods and services purchased by households.

During phase one, Prosperity/Peak, unemployment remains low, income is relatively high, consumers have confidence about the future. The following economic ratings are also high: CPI, GDP, and per capital GDP. There is a lot of credit available from the banks. Americans are spending money, and are employed at high rates. During a recession (contraction), phase two, things start a downturn. Consumers postpone making major purchases. Consumers only purchase needs, and don't purchase wants. Producers slow down production, and cut back their workforce causing unemployment to rise. Recessions normally last six months or longer, and generate a lot of stress and depression to consumers and those that lose their jobs.

Sometimes, a recession can take a further downturn and become a depression/trough. This phase is marked extremely high unemployment rates, decrease in employment and consumer spending. Banks decrease credit further and it is difficult to get loans. The following economic ratings are at their lowest points: CPI, GDP, and per capital GDP. The fourth phase, Recovery/Expansion, brings consumer confidence and lower unemployment rates. Businesses begin to seek additional employees, create more products and services. The following economic ratings: CPI, GDP, and per capital GDP begin to increase during a recovery phrase. The banks begin to expand credit which facilitates more spending and investment in businesses.