Business Cycle (Economic Cycle)

Definition

The term business cycle refers to the increase and decrease of goods and services in an economy over time. The business cycle is a tool oftentimes used to evaluate the overall state of an economy.

Explanation

Also referred to as the economic cycle, the business cycle is an increase and decrease in gross domestic product (GDP) over time. Expansion in the business cycle is measure from the trough of the prior cycle to the peak of the current cycle. Contraction in the business cycle is measured from the peak of the prior cycle to the trough of the current cycle. The entire business cycle is measure from peak to peak or trough to trough.

business cycleThe business cycle is representative of a rapid growth in an economy (an expansion) followed by a decline in growth (a contraction, or recession). This expansion or contraction in an economy is measured in terms of GDP, which is the total value of all goods and services produced by a country. Although the business cycle is normally shown as drawn in the accompanying illustration, the actual expansion and contraction cycles are less consistent than a sine way depiction. 

The business cycle occurs in four distinct stages:

  • Expansion: the expansion phase of the business cycle is characterized by an economy that is growing, an increase in GDP, and a decrease in unemployment.
  • Peak: the peak phase of the business cycle is characterized by an economy that is stagnating, flat growth GDP, and relatively low levels of unemployment.
  • Contraction: the contraction phase of the business cycle is characterized by an economy that is in a recession, negative growth GDP, and increasing levels of unemployment.
  • Trough: the trough phase of the business cycle is characterized by an economy that is just beginning to grow, flat growth GDP, and relatively high levels of unemployment.

Related Terms

short-run aggregate supplylong-run aggregate supplyaggregate supply, aggregate demand