Having extensive knowledge of the business cycle is important for investors and businesses. It can significantly affect the profitability of investments, how the company operates, and the risks it might face. Further, investors may find it practical to lessen their exposure to specific sectors and industries when the economy begins to contract, and vice versa. Business owners may use the cycle to decide when to invest and boost or decrease employment levels. Today, let’s explore the phases, templates, and business cycle graph that may help you fully understand the process.
What is Business Cycle?
Economists define the business cycle as a natural rise and fall in economic growth that takes place throughout time. Investors and consumers play a big role in the economic cycle’s stages and performance. Keeping an eye on the business cycle graph and phases, owners can monitor important factors in their businesses such as supply and demand. In addition to this, the cycle can help you analyze the economy and improve your financial decisions. This could also help you to develop business plans and strategies more efficiently.
What is Business Cycle?
Expansion
The first stage of the 4 phases of the business cycle is Expansion. It is when the economy grows quite swiftly, interest rates are typically low, and production rises. Wherein, the growth-related economic indicators often exhibit consistent upward trends throughout the expansionary stage. Economic indicators include employment and wages, total demand, and the supply of goods and services. The economy continues to have a stable money flow, and if the interest rates are low, money is low-cost. During the time of economic expansion, inflation could still increase due to the expansion of the money supply.
The indicator frequently used to determine economic production is the Gross Domestic Product. GDP rises during the Expansion stage. Productivity is typically shown on a curve as an upward trend because it is rising. A GDP growth rate of up to 2% is considered by economists healthy. Businesses require more staff when they increase production. As a result, more people are hired, and there is more money available for spending. Also, companies generate greater profits, and they can concentrate on expanding.
Peak
As growth accelerates to its highest rate, the economy achieves its Peak. This is the second stage of the 4 phases of business cycle wherein prices and economic indicators may stabilize. The economy has reached its peak before turning downward for a brief time. Peak growth can make economic imbalances that news to be fixed and needs strategic developments. Thus, when companies think the economic cycle has peaked, they may begin to review their expenditure plans and budgets.
Economic parameters including labor, profit, sales, and employment are higher during the peak phase but do not rise anymore. The demand for diverse items gradually declines throughout the peak phase as a result of rising input costs. While individual income remains constant, the rise in input costs causes a rise in the prices of finished goods. Customers reorganize their monthly budgets in order to sustain their everyday needs. Consequently, the demand for non-essential goods decreases.
Contraction
There is a reduction in labor force requirements as corporate production slows. As a result, consumers have less money to spend and firms invest less in expansion. Economic contraction refers to the rate at which consumption and production are changing negatively as a whole. See the template below to give you a glimpse of this phase.
The contraction stage starts when the economy reaches its peak, and enters a recession when the GDP rate declines. This means that growth slows down, employers lay off workers, and prices remain unchanged. Businesses may delay adjusting production levels as demand starts to fall, creating oversaturated markets with excess supply and a drop in pricing. The economic indices that had been improving throughout the expansion phase started to decline at this point. If the contraction persists, the current downturn could turn into a depression. On the business cycle graph, this phase is typically represented as the area of the curve that consistently decreases.
Trough
When the economy reaches its lowest point is called the Trough phase. The falling GDP starts to slow down and finally starts to alter positively again. During this stage, the economy is in a difficult position, with stagnant spending and income having a significant negative influence. However, this tough situation could still offer an opportunity for people and organizations to restructure their finances in expectation of a revival. Most of the time, businesses still proceed with the fifth stage of the business cycle phases which is known as the Recovery.
Economic Recovery is the phase that comes after a recession. It is the process of adapting and adjusting to new circumstances in response to a crisis. Moreover, the government implements new laws and regulations to bounce back from a recession. Typically, as the economy recovers, the gross domestic product (GDP), incomes, and unemployment all decrease.
Conclusion
To sum it up, learning the business cycle helps you to track economic activity in every phase it takes. It is very crucial to understand this cycle, especially for investors and businessmen, as it allows them to monitor which assets perform well in different stages. On top of that, understanding the business cycle graph gives an insight into how the increase and decrease of GDP affect the economy. Anyway, we hope that this article gives you a deep understanding of the phases of the business cycle. Follow GitMind for more upcoming blogs and templates like this to help you manage and prosper your business.
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