Business Cycle
The business cycle (also called the economic cycle or trade cycle) refers to the recurring fluctuations in economic activity—measured by gross domestic product and other indicators—that an economy experiences over time. A business cycle consists of alternating periods of expansion and contraction, known as booms and recessions.[1]
Definition
The business cycle describes the pattern of expansion and contraction in aggregate economic activity. It is characterised by four phases: expansion, peak, contraction (recession), and trough.[1]
Phases
| Phase | Description |
|---|---|
| Expansion | Economic activity grows; output, employment, and incomes rise. |
| Peak | The high point of the cycle, after which activity begins to slow. |
| Contraction (recession) | Activity declines; output falls and unemployment rises. |
| Trough | The low point, after which recovery begins. |
Indicators
Business cycles are measured using a range of indicators:
- Leading indicators — such as new orders and share prices, which tend to move before the economy.
- Coincident indicators — such as industrial production and employment, which move with the economy.
- Lagging indicators — such as unemployment duration and inflation, which tend to move after the economy.
Causes
The causes of business cycles are debated. Explanations include demand shocks, supply shocks, changes in monetary and fiscal policy, technological innovation, and the role of credit and asset price cycles. Different schools of thought—Keynesian, monetarist, and new classical—emphasise different mechanisms.[1]