Understanding the Stages of Business Cycle

The day Gone when business was just specific to buying and selling of goods. It has now become a broad term. For the smooth and successful business functioning, you need to understand several chronologies, business methodologies, business cycles, etc. Understanding the business cycle is significant to measure your business competences, market position, economic growth, improvised business financial decisions, and so on. Before we drill down the topic more, let's understand what business cycle is? How does it work? What are its phases?

What is the Business Cycle?

In simpler words business cycle is rise and fall in economic growth over a period of time. It can be used by government officials to grow countries' GDP and economic growth, the financial planner can use the data for better financial planning or decision making.  

The business cycle, aka economic cycle or trade cycle, can be defined as fluctuation, upward or downward movement of the country's GDP ( Gross Domestic Product), and its natural rate over a period of time. The business cycle is an aggregate of various macro and micro-economic variables such as GDP, employment, and consumption rate.

"According to Parkin and Bate: The business cycle is periodic but irregular up-and-down movement in the economic activity, which is measured by fluctuations in the GDP and several other macroeconomic variables. A business cycle isn't a regular, predictable, or repeating phenomenon like swinging of a pendulum. It's random up to a large extent and unpredictable.     

Who Measures Business Cycle?

The National Bureau of Economic Research measures the business cycle using quarterly business rates. It even uses several economic indicators, such as employment, income, production, sales.  

Business Cycle Phases

The business cycle completes when it goes through a single boom and contraction in the same sequence. The time taken to complete such sequence is referred to as the length of the business cycle. A boom is a period of growth with employment opportunities, economic growth, whereas recession is characterized by decline or download of GDP, stagnated economic growth, etc. Each business cycle comprises six phases expansion, peak, recession, depression trough, and recovery. Remember, they don't occur in a regular interval but has recognizable indicators.  

• Expansion: It's the initial phase of a business. Where the business cycle is showcasing an upward movement, the positive economic indicators increase, such as employment, profits, wages, investment, money supply, and even the debtors are paying on time.
• Peak: The peak follows the expansion stage. It's the point where the economy reaches the saturation point. The maximum growth is attained; growth indicators are at the top and cannot expand further. Prices are at a peak. It's the turning point in economic growth.  
• Recession: A recession follows the peak stage. It's the business shrinks, the demand of products decreases rapidly and steadily in this phase. The manufacturer didn't halt the production, which creates the situation of market surplus. It eventually results in falling the price. All positive indicators like employment, incomes start to decline.  
• Depression: There is a steady rise in unemployment. The economy starts declining, and its called depression.  
• Trough:Its a depression state, where the economy reaches a negative point. Prices are at the lowest price, and sales are null. It's a negative saturation point for an economy. Even there is depletion in national income.   

·         Recovery: Trough isn't the end stage of a business cycle. Several measures are adapted to bring positive spark in the economy. 

In the recovery phase, the economy starts accelerating up. Prices and demands start to rise up.

Impacts of Business Cycle

The business cycle has a deep impact on the economy. It comprises mainly four phases, which include booms, downturns, recession, and recoveries. Some of the impacts of the business cycle are as follows:

·         Employment: When the business cycle is at expansion or peak phase, it's the time of high employment as demands are high, so it needs more workers. Whereas in times of downturns, recessions start, which leads to rising unemployment.   

·         Consumer Demands: A business cycle is a significant factor which determines or fluctuates the demand for product or services. When the business is low, there is unemployment or less income, which leads to less purchasing power. When the demand is less, sales diminish, which ultimately results in shrinking profits and losses.

·         Surviving Business Cycles: Overcoming recession and downturns is the biggest challenge faced. During recoveries, new methods are developed, which aids in sustaining in the long-term. Business planners, analysts, CEOs can conduct a meeting to discuss newer methodologies and market conditions. Suppose you have a business presentation approaching soon. Then check out some of the best business PowerPoint templates. 

Factors Affecting Business

The goal of every entrepreneur is to identify the factors that impact the business over a large scale. Analysing such factors aids in effective decision making. Some of the economic factors which effects business are:  

·         Consumer Confidence: Consumer confidence is the determining factor when it comes to buying stuff. Confident consumers tend to buy more or invest more in a particular brand than less confident consumers. So always invest to gain the confidence of your customers.   

·         Employment: Employment can adversely impact the economy. During the boom period, employment is high, whereas in times of recession or recovery, there is low and even no jobs. Unemployment results in reduced consumer spending, which ultimately results in less demand.  

·         Inflation: Inflation is the rate by which prices get higher in the economy. The high inflation rate increases other business expenses like rent, material cost, and so on. Rising costs force businesses to elevate their product and service costs. Inflation impacts the purchasing power of the consumers if wages aren't based on the inflation rate.

 Now you might have understood what business cycle is? And how it impacts the business and overall economy. According to the expert's business cycle occurs randomly in the economy, whereas, according to experts, it is controlled by nations or central banks by intervening in their monetary policies.