What is the Economic Cycle?

The economic cycle refers to the period when the economy fluctuates between expansion and contraction stages. One can refer to expansion as growth period, and contraction as recession period. Economists evaluate the present economic cycle by analyzing factors such as interest rates, employment levels, purchasing power of consumers, GDP or gross domestic product, etc. of a country.When the economy is in expansion stage, individuals invest in industries dealing in technology, and capital goods. However, during the contraction stage, they focus more on buying businesses that specialize in financials, healthcare, utilities, etc.

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Stages of the Economic Cycle

An economic cycle, synonymous to the business cycle, involves four stages including expansion, peak, contraction, and trough. The expansion phase takes place when the economy is growing steadily, there are lower rates of interest, more production levels, and more pressure on inflation. When the economic growth reaches the maximum point, it refers to the peak stage. However, this maximum growth levels brings economic imbalances or variations which demand immediate check. The contraction stages fixes these imbalances when economic growth starts declining, employment rates diminish, and price decline as well. The trough stage takes place when the economy experiences an intense low in growth, and from this point, the economy again starts recovering.

Economic Cycle Length

The National Bureau of Economic Research (NBER) is a defined source that creates an official calendar for U.S. economic cycles. NBER is ascertained based on the fluctuations in gross domestic product (GDP). It performs the function of determining the tenure of economic cycles from peak to peak, or trough to trough. Since the 1950s, the economic cycles of the U.S. have remained in existence for an average of around 5.5 years. Seeing the stats, there are huge variations in the time periods of cycles, that means some cycles from peak to peak phase lasted for 1.5 years (from 1981-1982), while some of them lasted for around 10 years (from 1991 to 2001).

Management of the economic cycle

The government authorities manage and regulate the economic or business cycle. They use fiscal policy optimally for controlling the economic cycle and the stages involved. The government implements expansionary fiscal policy when it has to bring the recession to an end. In the same manner, it uses contractionary fiscal policy to bring the economy to a stable level. In order to manage the economic cycle effectively, central banks consider implementing monetary policy. During troughs, the central bank reduces the rates of interest, or execute expansionary monetary policy. And when the bank has to control the peak stage, it uses a contractionary monetary policy, and hikes the interest rates.

Causes of economic cycle

There have always been debates about the causes of economic cycles for many decades. As per the monetarist school of economic thought, the economic cycle is related with the credit cycle. The increase or decrease in interest rates can either make the economy grow or fall. Based on these interest rates, it can be either expensive or affordable for borrowers including commoners, organizations and government. Another approach by Keynes is of the view that the fluctuations made in aggregate market demand due to inconsistency and volatile demands for investment play a significant role in causing economic cycles. However, many economists such as Irving Fisher didnt support the equilibrium concept, and say that there is a gradual shift in the areas of disequilibrium with producers consistently investing more or less, and producing more or less with a view to meet the consumer demand becomes the primary reason that business cycles exist.