Phases of the Business Cycle

By: Lauren Winslow

The Business Cycle

The economy goes through periods of alternating growth and decline. These periods make up the business cycle. Since the phase of the business cycle that we are in indicates what type of economy we are experiencing, it is important to understand what it means to be in a phase of the business cycle, what we can do to stay in a good phase of the business cycle, and what we can do to get out of a bad phase of the business cycle.

Vocabulary

The 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 and services.


Consumer price index (CPI): a measure of the average price of consumer goods and services purchased by households

Phase 1: Prosperity/Peak

The unemployment remains low and income is relatively high. Consumers have confidence about the future state of the economy which leads to more purchases. Demand is high producers expand businesses to take advantage of marketplace opportunities. That are high levels of output and trade. CPI, GDP, and per capita GDP are high. There is a lot of credit available to consumers. This means it's easy to get a loan.


During this stage, things would probably be about the same. We would purchase things that we needed, but we would also purchase things that we wanted. Americans would be quicker to buy things.

Phase 2: Recession/Contraction

This is an economic downturn that last for six months or longer. Consumers postpone major purchases. Consumers will begin to buy basic low priced products that satisfy their needs, instead of their wallets. Producer slowdown production and cut the size of their workforce and cut wages/salaries. Trade decreases. Investment plans get canceled. CPI, GDP, and per capita GDP decrease. Banks decrease credit. This means it is harder to get a loan.


In this stage, my family would be more careful about their spending. You don't know whether the economy is going to improve or get worse. We would probably still purchase things that we wanted, but we would definitely be more careful not to waste money.

Phase 3: Depression/Trough

Sometimes a recession can downward spiral into a depression. Economies don't always experience every phrase in the business cycle. Four instance, and economy could go directly from a recession phase 2 to a recovery phase 4. A depression isn't even further decrease in employment and consumer spending. Unemployment is extremely high. Producers will create less goods and services because there are fewer people who are able to buy their goods and services. Trade is at a love. CPI, GDP, and per capita GDP are at their lowest points. Thanks decrease credit further. It is even more difficult to get a loan.


During this stage, my family would only be able to focus on needs. Instead of spending money on a vacation, we would use that to buy groceries and other necessities. We would have to adjust our budget in order to stay out of debt.

Phase 4: Recovery/Expansion

In the recovery stage, consumer spending increases and people once again begin to buy goods that satisfy wants as well as needs. Unemployment begins to decrease because businesses seek additional workers to create more goods and services once spending increases. Businesses begin to invest in trade more. CPI, GDP, and per capita GDP begin to increase again. Thanks begin to expand credit. It becomes easier to get loans again.


In this stage, my family would be very relieved. We would begin spending on wants again, but we would likely still be afraid to splurge or waste any money. Americans would also begin paying for more products and services, helping the businesses and further boosting the economy.