Question

Explain why business cycles exist and how the various phases reflect different types of employment rates.

Answer 1

The business cycle is the inevitable upsurge and downsizing of economic growth over time. The cycle is a useful instrument for economic analysis. It can also be of help in making better financial decisions.

There are four phases to each business cycle. They are expansion, peak, contraction and trough. They do not occur at periodic intervals. However, they do have identifiable indicators. Between trough and peak is an expansion. That is when the economy is on the increase. The gross domestic product is that which measures economic output. The rate of GDP growth is within a healthy range of 2 to 3 percent. Unemployment ranges from 4.5 to 5 per cent in its natural rate. Inflation is close to its target of 2 per cent. In a bull market the stock market is. For years a well managed economy can remain in the phase of expansion. That is called an economy called the Goldilocks.

The second phase is the peak. It is the month in which expansion progresses into the process of contraction.
The third phase is a contraction. It begins at peak and finishes at trough. Weakens economic growth. Growth in GDP dropped below 2%. That is what economists call a recession, when it becomes negative. Mass layoffs are becoming headline news. The jobless rate is starting to rise. It does not happen until the end of the process of contraction, because it is a sign of lagging. Companies are waiting to hire new workers until they are certain the recession will be over. With investors selling, stocks enter a bear market.

The trough is step four. That is the month the economy transitions from the phase of contraction to the period of growth. It's when the economy crashes down.