The Business Cycle

By: Abby Jennetta

The Business Cycle & Importance

The business cycle occurs as the economy goes through periods of alternating growth and decline. It's important to know what it means to be in a certain phase, what we can do to stay in a good phase, and how we can get out of a bad phase.

Tools to Determine Phases

  • Gross Domestic Product (GDP) - the total value of all final goods and services produced within a country in a given year.
  • Per Capita 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 & services.
  • Consumer Price Index - a measure of the average price of consumer goods and services purchased by households.

Phases of the Business Cycle

  1. Prosperity/Peak : During this phase, unemployment is low and income is at an overall high. Consumers are confident in the purchases they are making, so demand increases. Producers also expand their businesses for market opportunities. The CPI, GDP, and per capita GDP are high. Anyone during this phase would surely be in a good place. They would not have to worry about the scarcity of products when they go shopping and business owners would receive a larger profit due to the economic prosperity.
  2. Recession/Contraction: This phase occurs when there is an economic downturn that lasts for 6 months or longer. Consumers begin to postpone purchases and result to only buying low priced & basic goods. Banks will have to lower their credit, making it harder to receive loans. The CPI, GDP, and per capita GDP will be much lower than before. Americans during this phase would often need to adopt a budget for their money so they do not risk overspending and running out of money. While the demand for products lessens, businesses may have to begin to drastically lower their prices to guarantee themselves some sort of profit.
  3. Depression/Trough: Within this phase, there is an even further decrease in employment. Consumer spending continues to drop, leading to the creation of less goods & services by businesses because they now have no one to make purchases. The CPI, GDP, and per capita GDP are at an all time low. Americans living during this phase may began to lose their homes or businesses due to not being able to pay mortgage or rent because of the lack of income. This occurred during the Great Depression when the economy reached a decline and many Americans began to live on the streets because their homes were foreclosed on.
  4. Recovery/Expansion: As the economy begins to come back from its depression, consumer spending increases again and unemployment decreases because workers are needed to increase production. Businesses begin to invest more and the CPI, GDP, and per capita GDP rise once more. In this phase Americans can once again begin to live the lifestyle they experienced in the prosperity phase. While things won't immediately go back to how they were, through the work of the people to again become employed and make money will the economy reach its best.