Four Phases of the Business Cycle

By Sophia Sload


The prosperity or peak part of the business cycle means that the economy is thriving. This is usually a good time economically for many citizens. People usually have jobs and are making good money at this point in their lives. This may cause them to purchase more or maybe even use a credit card more. Getting a loan is also easier so more people may purchase a house, business, or property during an economic peak.

  • Levels of Consumers or Business Confidence- The confidence levels of consumers and businesses are high because there is more money to go around. Businesses may expand and consumers may buy more or even use credit cards.
  • Employment- During this time the employment level is high. Businesses look to hire more workers so that they can produce more product or service in a faster amount of time. This is necessary because people have the money to pay for this.
  • Income- The income for these employees is relatively high because the employer they work for can sell the product at ah higher price. This results in more money to distribute.
  • Trade- Trade is more successful during a peak as well.
  • Output- The output is high because more employees are working to produce a larger quantity of goods. This helps money wise.
  • Credit- More credit is available during an economic peak. This make it easy to get a loan. More people may buy a house, business, or property because of this.
  • Investment- Since most people have more money during this time they are more willing to invest. They feel stable so taking a risk is not a big deal.
  • CPI- The CPI is also higher because households are willing to spend more. More people are employed and receive a higher income.
  • GDP- More goods are produced during prosperity because more people are part of the workforce.
  • Per Capita GDP- This is also high because of high employment levels during this part of the business cycle.


During a recession/contraction the economy is slowly getting worse. One aspect that effects people the most is the rising unemployment rate and the lower wages. This may cause a family or individual to watch how much they spend on goods that they do not need. Also it may cause a business to not expand or invest as much money as they would if they were in a peak.

  • Levels of Consumer or Business Confidence- Since the economy is getting worse the amount of money made or available is slowly decreasing. It is also harder to get a loan. This might make a consumer or business less confident in making major purchases.
  • Employment- There is less money being made so less employees are able to have jobs. There is usually not a major decrease but the employment rate is going down because less is being purchased by consumers.
  • Income- Their income is also sometimes decreased because consumers are only purchasing what they need and not all of their wants.
  • Trade- Trade is also lower because less money is being made by individual companies or businesses. They might not be able to afford trade such as international trade.
  • Output- The output is usually less on certain items because not as many people are buying. They especially aren't producing a lot of items that are high in cost or are not necessary to most of the population.
  • Credit- Less credit is available meaning that it is difficult to get a loan. You must have a good credit score because banks do not want to risk money during this time.
  • Investment- Investment plans usually get cancelled during a recession because of the lack of money in the system during this time.
  • CPI- The amount bought per household goes down because their is less money and the wages are lower. CPI is also effected by the unemployment rate.
  • GDP- Less goods are produced causing the GDP to go down. Most people don't have the money to purchase more.
  • Per Capita GDP- Also the amount added to the economy per person is slowly decreasing at this time as well. One reason for this is unemployment.


During an economic depression/trough the economy is at it's lowest point possible. This has a huge impact on people's lives. Since many are unemployed lots of families don't have money to pay off loans or mortgages causing them to lose a house or car. People spend the bare minimum amount of money.

  • Levels of Consumer or Business Confidence- Consumers and businesses have a very low level of confidence because they do not have much money to spend because they are only making a meager amount. This causes the spending for both the majorly decrease.
  • Employment- Employment rates are even lower than they are during a depression than a ressecion. This makes it very hard to find a job and support yourself or family.
  • Income- Since employers are not making much money they do not have much to offer employees.
  • Trade- The trade is lower then ever. Since their is very little being purchased not much is being traded.
  • Output- Less is being produced by factories and companies because the demand is lower. They do not have the money to spend on production of these products if very few consumers will buy them.
  • Credit- The amount of credit available is very low because lots of people are not able to pay back the loans that they confidently took out before. This makes it unlikely to get a loan. Many people do not purchase property or a home during a reseccion.
  • Investment- People do not have money to risk losing so investment is unlikely. Very few, expect for finacially stable people, are able to invest during these difficlt times even if there is a chance the result could be positive.
  • CPI- Since less people have the money to buy products the amount bought by consumers goes down. This means that the producers selling the items get less money.
  • GDP- Since citizens are able to buy less, a lower amount is being produced so money is not being wasted.
  • Per Capita GDP- Employment rates are very high causing less people to create more money for a countries economy.


During an economic recovery/expansion the economy starts to get better or recover from the devastating depression or harmful recession that occurred before it. People are starting to spend more on wants and needs because they are most likely employed and have a high wage. This can cause people to make more purchases or to buy a house. Some big impacts that occur are more jobs. One thing that I have personally seen during a recovery was a housing boom which caused more jobs.

  • Levels of Consumer and Business Confidence- The levels of consumer and business confidence start to get higher than they were during the recession but not as high as a peak. Consumers are willing to purchase more and businesses are looking to invest with confidence.
  • Employment- The employment rates start to increase compared to before. People are now willing to buy more so companies need workers to create the product for the customers.
  • Income- The income of these employees are higher than before but are still not to the peak. They are high enough that most are able to start spending more and don't have to limit themselves on this.
  • Trade- The trade also starts to increase from what it was.
  • Output- The output produced is higher because people have more money to spend and can purchase more.
  • Credit- Banks offer more credit. It is easier to get a loan during a recovery.
  • Investment- People are more willing to take a risk in an investment when the economy is slowly improving from it's former state. The stock market often benefits from an expansion which may later cause a peak.
  • CPI- More is being produced because people are willing to buy it so the CPI or the Consumer Price Index increases.
  • GDP- The total value of all goods and services produced within a country during a given year increases during an economic recovery. It is important to know that since more investments are occurring many business are expanding and producing more.
  • Per Capita GDP- Since the Gross Domestic Product increases that means the per capita Gross Domestic Product must increase to.
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