The 4 Phases of the Business cycle

The Phases

Getting Stared

What is the business cycle? The business cycle is the periods of alternating growth and decline in the economy. The first phase is...

Expansion: The expansion phase is the first phase and it is when there is an expansion of output, income, employment, prices, and profit. There are features of this phase and they are high levels of output and trade, high levels of effective demand, and high income and employment. Also there are rising interest rates and inflation. Because of the full employment of resources, the level of production is maximum and there is a rise in GDP and this causes a rise in prices and profits. Credit conditions stop tightening and investments are growing. Life for Americans is pretty good.

Peak Phase:The second phase is the peak phase. This is when the highest point between the end of an economic expansion and the start of of a contraction in the business cycle. This is right before employment and other economic indicators begin to fall. The GDP is at it's highest level. However, interest rates are climbing because investors are concerned about rising inflation. Life is Americans is still good but its at its highest so its about to go stop being quite so good.

Contraction Phase:The third phase of the business cycle is the contraction phase. This is the point in the cycle where the economy is, as a whole, declining. The GDP has declined by two or more consecutive quarters. For most people this is the source of economic hardship. People begin to lose their jobs at this point. This phase does not last for forever but its difficult to asses how long it will continue. This is the hardest phase for Americans. Income and output is not good.

Trough Phase: This is the stage in the economy that marks the end of decline business activity and transition to expansion again. The GDP may still be negative but it is slowly getting better and isn't as bad as it once was. People will start to slowly get hired again. Businesses have lowered their prices and the economy is finding its footing. The stock market tries to anticipate the coming economic expansion. Income and output are getting better.