Business Cycle explained with Expansion, Recession, Depression and Recovery

A business cycle, also known as an ‘economic cycle’ or ‘trade cycle’ is the alternate expansion and contraction in overall business activities over time in an economy.

It is the rise and fall of economic activities in a cyclic manner characterized by four phases; Expansion (Boom), Contraction (Recession), Depression and Recovery.

Expansion

In this phase of the business cycle, an economy experiences expansion in all dimensions, leading to accelerated and prolonged demand and increased investment, production, employment, etc.

This phase is also known as the ‘economic boom‘, and the upturn or upswing of Real GDP. At this stage, the economy may suffer due to inflationary pressure that can be avoided by having an adequate supply of goods and services in the market.

Recession (Contraction)

In this phase of the business cycle, the overall economic activities decline leading to low economic output or the Real GDP. This phase also experiences low inflation due to low demand and consumption expenditure.

A recession is somewhat different from an economic slowdown as a recession signifies a drop in the GDP while a slowdown is merely a decline in the growth rate of the GDP.

Depression

When an economy continues to suffer recession for two or more consecutive quarters, it is called depression. Generally, it is a severe and prolonged recession.

In this phase of the business cycle, the level of productivity in an economy falls significantly. Both the GDP and GNP show negative growth along with greater business failures and unemployment.

Recovery

It is that phase of the business cycle when an economy tries to come out of the low-production phase. The low production phase may be a recession or depression.

To recover the economy the government as well as the central bank (RBI) take many fiscal and monetary measures to boost demand, investment and production.

As this phase gains momentum, an economy again enters into the phase of expansion. This, a business cycle gets completed.