Business Cycle

The business cycle is characterised by four phases.

[1] Depression

[2] Recovery

[3] Boom

[4] Recession



Depression is a severe and prolonged downturn in economic activity.

Generally, when an economy continues to suffer recession for two or more quarters, it is called depression.

A depression is said to begin when GDP declines more than 10% from the most recent economic peak.

During the phase of Depression the growth rate becomes negative.

During the phase of Depression the level of national income and expenditure declines.

The level of productivity in an economy falls significantly during a depression.



The turning point from depression to expansion is termed as Recovery.

During this phase there are expansions and rise in economic activities.

When demand starts rising, production increases and this causes an increase in investment.

There is a steady rise in output, income, employment, prices and profits.

To recover an economy, governments usually go for tax-breaks, interest cuts, an increase in salaries of its employees, etc.



A strong upward fluctuation in the economic activities is called boom.

In this phase, unemployment levels fall.

In this phase, consumer’s confidence starts to increase at a faster pace.

Demand peaks up to such a high level that it exceeds sustainable output/production levels.

The phase of recovery is considered good for the economy and it reaches the stage of boom which is considered better.

Boom is usually followed by price rise.



Recession is a slowdown in economic activities.

A significant fall in spending generally leads to a recession.

The term recession describes the reduction of a country’s gross domestic product (GDP) for at least two quarters.

Causes of recession—

Currency crisis, Energy crisis, War, Under consumption, Overproduction, Financial crisis, Price of Fuels.

In recession—

[a] there is a general fall in demand as economic activities takes a downturn.

[b] inflation remains lower.

[c] employment rate falls.



Direct and indirect taxes should be cut down.

The burden of direct tax, specially the income tax, dividend tax, interest tax is slashed to enhance the disposable income.

Indirect taxes should be cut down so that produced goods reach the market at cheaper prices.

The government usually goes on to follow a cheap money supply policy.