Four phases of the business cycle

Hattie Haines

Phase one: Prosperity/peak

This phase is a good one. Unemployment is down and the average income is high. People are hopeful in the economy and have more money to spend so more money is cycling through the economy; Because of this spending by consumers the businesses are more confident to spread out to take opportunities they see. These expansions lead to trade and output being higher. At this time it would also be easy to gain access to a loan since the amount of credit offered would be large due to the economic state. The CPI is higher and although this stage in the economy is pretty good this is the bad spot. When the CPI is higher this is good for government and businesses but this is not good for most consumers. People who have wages set before inflation and no quarterly raises will be in a rut because it will cost more to maintain their standard of living up to that point. The GDP and per capita GDP are high which is a good sign for our economy.

Phase Two: Recession and Contraction

This phase is seen as not so good. A Recession causes people to postpone getting bigger items or making a large purchase. When the economy is like this people tend to look at what they need rather than what they want; This is due to businesses cutting their wages and work force down which can put people in a tough spot financially. Businesses also decrease their trading and people don't invest in companies as much at this time. The CPI may decrease and that is good for consumers but not good enough for the consumers that lose work or lose money due to their jobs. GDP and GDP per capita lower themselves and this is good for no one. As for those that need to take out a loan, possibly due to the financial situation their job has put them in, it can be very difficult. The banks are more hesitant to give out money because they may not see that money for quite sometime.

Phase three: Depression/trough

A recession can, at times, turn into a depression. Although this phase is not experienced much, when it is it is a Depression times become very tough. Unemployment becomes very high due to lay offs and cut backs, families and people are losing money so they no longer have the money to spend of things. People buy what they need to survive and this is hard on companies. Businesses start producing fewer goods and services are used less. People are using and buying less so trade becomes low as well. The CPI is quite low and this is good because otherwise people may not be able to buy what they need. Some people cant even get what they need with what they do have but a loan at this time is hardly an option. The banks do not want to loan out money at this point and getting a loan is probably near impossible. GDP and GDP per capita would be at their lowest point due to the lack of money flowing through the economy.

Phase four: Expansion/recovery

This is the stage that is bringing the economy back up to peak. This stage occurs after a recession or a depression. Businesses are on the way up and so is the GDP. Because the businesses are on the way back they need more employees, unemployment begins to decrease. People have more money once more and start buying more and spending more of their money. Inflation takes over the CPI and this return to a more regular price. Trade starts up again and we are back on our feet once more. It is also easier for people to get a loan at this time and be able to pay it back.