Question

Identify and graph the four phases on the business cycle, a cycle that is illustrating long run economic growth. Explain in detail what is happening in each phase of the cycle. (40 pts - this is a big question, be certain your explanation matches the point value)

Answer 1

The Business Cycle

The term refers to all the economic aspects (like production, trade, and general economic activity). From a conceptual perspective, the business cycle is fluctuations of levels of GDP (gross domestic product) and refers to the period of expansions and contractions in the level of economic activities (fluctuations) in the long-term growth trend.

Business Cycle Phases

Business cycle is identified as having four distinct phases in the economy: Recovery, Boom, Recession, and Depression.

A recovery stage is characterized by increasing employment, economic growth and prices. A Boom is stage of the highest point of the business cycle, when the economy is producing optimum output, full employment or equal and increasing prices. Following a stage of boom, the economy typically enters into the stage of recession, where growth slows, employment declines (unemployment increases), and pricing also starts decreasing. The slowing of an economy further reach at the stage of depression and at this point the economy has hit a bottom from which the next phase of recovery and recession will emerge.

Understanding the Business Cycle Fluctuations

Business cycle fluctuations occur around a long-term growth trend and are usually measured in terms of the growth rate of real gross domestic product of a country and its economy.

A recovery is the period from a depression to a boom, and a recession as the period from a boom to a depression. The recession is identifying as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production.” This is significantly different from the commonly cited definition of a recession being signaled by two consecutive quarters of decline in real GDP.  If the economy does not begin to expand again then the economy may be considered to be in a state of depression.