Business Cycle - Definition, Phases & Effects
                     BUSINESS 
CYCLE: 
DEFINITION, 
PHASES & 
EFFECTS
 A business cycle is a cycle of fluctuations in the Gross Domestic Product (GDP) around 
its long-term natural growth rate. It explains the expansion and contraction in economic 
activity that an economy experiences over time.
INTRODUCTI
ON
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 A business cycle is completed when it goes through a single boom and a single 
contraction in sequence. The time period to complete this sequence is called the length 
of the business cycle. 
TIME PERIOD
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Phases of the 
Business Cycle
 The first stage in the business cycle is expansion. In this stage, there is an increase in 
positive economic indicators such as employment, income, output, wages, profits, 
demand, and supply of goods and services.
Expansion
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 The economy then reaches a saturation point, or peak, which is the second stage of the 
business cycle. The maximum limit of growth is attained. The economic indicators do 
not grow further and are at their highest. 
Peak
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 The recession is the stage that follows the peak phase. The demand for goods and 
services starts declining rapidly and steadily in this phase. Producers do not notice the 
decrease in demand instantly and go on producing, which creates a situation of excess 
supply in the market.
Recession
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 There is a commensurate rise in unemployment. The growth in the economy continues 
to decline, and as this falls below the steady growth line, the stage is called a depression.
Depression
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 In the depression stage, the economy’s growth rate becomes negative. There is further 
decline until the prices of factors, as well as the demand and supply of goods and 
services, contract to reach their lowest point. 
Trough
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Effects of the 
Business Cycle
 Political uncertainty creates fear among the business community which prevents or 
delays investment. For instance, after the 2016 Brexit vote in the UK, business 
investment stagnated. When it became uncertain as to how and when the UK would 
leave the EU, business investment started to decline, particularly into 2018.
Political 
Uncertainty
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 High-interest rates make it more difficult for businesses to invest. For instance, a small 
store that is just starting is going to find it hard to make repayments at an interest rate 
of 20 or 30 percent. It also sucks out money from the economy and re-directs it to the 
banks. 
High Interest 
Rates
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 Inflation can create a drain on consumer incomes as it decreases its value year on year. 
Therefore, if firms do not increase wages in line with inflation, the average worker will 
be able to afford less than before.
Declining 
Real Incomes
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