Business Cycle


Business cycle

The business cycle is characterized by four phases.

[1] Depression

Depression represents a serious and prolonged economic decline.

The term depression is used when an economy begins to experience recession for two or more quarters.

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.

During the phase, the amount of productivity in an economy declines significantly.

 

[2] Recovery

Depression-to-expansion turning point is called Recovery.

Throughout this period economic activity is growing and increasing.

Output increases as demand continue to grow and this triggers an increase in investment.

Production, revenue, jobs, prices, and profits are steadily on the rise.

Governments typically go for tax breaks, interest cuts, a rise in their workers ‘ wages, etc. to recover an economy.

 

[3] Boom

Boom is a heavy upward fluctuation in economic activity.

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

Demand rises to a point that exceeds sustainable levels of output/production.

The recovery period is perceived to be positive for the economy and is best viewed at the boom stage.

Boom is usually followed by a price rise.

 

[4] Recession

Recession is a slowdown in economic activities.

In general, a large decrease in spending leads to a recession.

In recession country’s gross domestic product (GDP) reduces 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.

[b] inflation remains lower.

[c] employment rate falls.

Remedies:

  • Direct and indirect taxes should be cut down.
  • The burden of direct tax, especially 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 follows a cheap money supply policy.