The Phases of the Business Cycle

The business cycle describes the rise and fall in production of goods and services in an economy, measured using the rise and fall in the real gross domestic product (GDP).

Expansion

In this stage, there is an increase in positive economic indicators such as employment, productivity, wages, profits, demand, and supply of goods and services.

Peak

At this stage, economic growth is at its maximum. Unemployment is at its lowest. Demand for consumer goods is at its highest. Inflation is at the highest that the economy can withstand.

Recession

At this stage, the business cycle has entered into a downward economic trend. These are considered times of contraction. To be considered a recession, the economic trend must be in contraction for at least 6 months. There is less demand for goods and services. And as a result of less demand, an excess in supply causes lower prices.

Depression

The economy is considered to be in this stage when a recession stretches from 6 months to 3 or more years. It is also defined as a decrease of real GDP, Gross Domestic Product, of at least 10%. Unemployment rises and production of goods and services falls further. Consumer confidence and stock market investing levels decrease. Note that since 1854, there have been 33 recessions and just one depression.

Trough

This stage marks the lowest point in economic decline and the end of the recession/depression. Demand and Supply of goods and services reach their lowest point as well.

Recovery

Low prices spur an increase in demand, as a result, employment and production start to rise. This stage marks the end of one business cycle.