What Is A Business Cycle: Phases, Features & Impact on The Economy

A business cycle shows how an economy grows and shrinks over time through regular fluctuations.

It includes phases like expansion and contraction, affecting GDP, jobs, spending, and overall economic health.

Let’s take an example to understand how the business cycle works, and it’s super relatable!
 

• In 2019, a small town in India had a booming textile industry. The local GDP was ₹6,000 crore, and about 60,000 people had jobs earning an average of ₹25,000/month. Shops were busy, real estate was growing, and life was good!
   
• But then came 2020, and the pandemic hit. The economy shrank to ₹4,800 crore, 10,000 jobs were lost, and average income dropped to ₹18,000/month. Families spent less, small shops shut down, and things got tough.
   
• By 2022, recovery began, new jobs opened, income improved, and spending picked up.
   

Isn’t it interesting how these ups and downs impact everyday life? That’s the business cycle in action!

What is a Business Cycle?

A business cycle shows how an economy grows and shrinks over regular time intervals. It includes phases like expansion, peak, recession, and recovery, based on GDP and employment.

Let’s understand it with the help of an example:

Let’s imagine a small country’s economy over 5 years, using GDP (Gross Domestic Product) as the main indicator:
 

Now, in Year 6, if GDP starts increasing again (say ₹1,150), the economy enters Recovery and the cycle repeats.

This example shows that economies don’t just keep growing all the time; sometimes they rise, and sometimes they fall. It’s like a wave, going up and down, and that up-and-down movement is what we call the business cycle.

Phases of a Business Cycle

1. Expansion

In this phase, businesses grow, more jobs are created, and people spend more as the economy improves steadily.
Production increases, investments rise, and overall consumer confidence boosts economic activity across various sectors.

Example:

• Year 1 GDP: ₹1,000 crore
   
• Employment: 90,00,000 jobs
   
• Ravi’s monthly shop sales: ₹1,00,000
  
  By Year 2, GDP grows to ₹1,200 crore, jobs rise to 95,00,000, and Ravi earns ₹1,50,000/month.

2. Peak

This is the highest point where growth slows down, but employment and production remain at their maximum levels.
Inflation may start rising, and the economy shows signs of overheating due to high demand and resource usage.

Example:

• Year 3 GDP: ₹1,400 crore (no further increase afterwards)
   
• Employment: 98,00,000 jobs
   
• Ravi’s sales: ₹1,80,000/month (maximum)
  
  Costs are rising, customers start spending cautiously, and growth levels off.

3. Contraction (Recession)

Economic activity declines, businesses cut costs, jobs are lost, and people spend less during this slowing phase.
Investments fall, incomes drop, and overall demand decreases, leading to a dip in production and growth.

Example:
 

• Year 4 GDP: ₹1,150 crore
   
• Employment: 93,00,000 jobs
   
• Ravi’s sales fall to ₹1,10,000/month
  
  He stops hiring, reduces inventory, and sees fewer customers.

4. Trough

This is the lowest phase where the economy hits rock bottom before starting to grow again.
Unemployment is high, demand is weak, and confidence is low — but recovery usually follows this phase.

Example:
 

• Year 5 GDP: ₹1,000 crore
   
• Employment: 90,00,000 jobs (lowest in 5 years)
   
• Ravi’s sales: ₹80,000/month
  
  He earns barely enough to cover costs. But as more people return to shop, Year 6 may bring recovery.

These numbers make it easy to see how things like a country’s income (GDP), jobs, and business earnings go up and down over time. It’s a simple way to understand how the economy works through different stages, that’s what we call the business cycle.

Features of a Business Cycle:

The business cycle has several key features that help explain how economies expand and contract over time. The table below summarises these features in a simple format:

Understanding these features helps economists, businesses, and policymakers prepare for and respond to changes in the economy more effectively.

Impact of Business Cycles on the Economy:

Business cycles affect jobs, income, and spending. Expansions bring growth, while recessions cause decline. These changes directly impact people’s lives, influencing poverty levels, living standards, and social well-being.

Let’s understand it with the help of an example:

Let’s say a small city over two years to see how the business cycle affects the economy:

Year 1: Expansion Phase
 

• GDP: ₹5,000 crore
   
• Jobs: 50,000 people employed
   
• Average Monthly Income: ₹25,000
   
• Consumer Spending: ₹1,200 crore/month

What's happening?

The economy is doing well. Businesses are hiring, people have money to spend, and shops are busy. New malls, schools, and clinics open up. Life is improving for most families.

Year 2: Contraction (Recession) Phase
 

• GDP: ₹4,200 crore
   
• Jobs: 42,000 people employed (8,000 jobs lost)
   
• Average Monthly Income: ₹20,000
   
• Consumer Spending: ₹900 crore/month

What's happening?

Many people lose their jobs. Families cut back on shopping, vacations, and medical expenses. Some struggle to pay rent or school fees. Local businesses earn less and may shut down. Society feels the stress both financially and emotionally.

This shows that when the economy changes, it affects people’s jobs, income, and daily life. It helps us understand how the business cycle can impact everyone in real life.

Conclusion:
 

The business cycle is like a wave; sometimes the economy goes up, sometimes it goes down. It affects our jobs, income, and spending. Just like in Ravi’s story, numbers show how real lives change. Understanding this cycle helps us plan better and stay strong. After every low, there’s always a chance to rise again.

FAQs:

Q1: What is the nature of the business cycle?

It refers to the natural rise and fall in economic activity over time, reflecting overall economic conditions.

Q2: How can the business cycle be controlled?

By using counter-cyclical policies like adjusting government spending and interest rates to stabilise the economy.

Q3: What does the business cycle depend on?

The business cycle depends on external factors like inflation, exchange rates, and overall socioeconomic conditions.

 

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