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What Is a Business Cycle?

• How It Works
• Measuring and Dating
• Relationship With Stock Prices

The Bottom Line

Business cycle: what it is, how to measure it, and its 4 phases.

• Depression in the Economy: Definition and Example
• Economic Collapse
• Business Cycle CURRENT ARTICLE
• Boom And Bust Cycle
• Negative Growth
• What Was the Great Depression?
• Were There Any Periods of Major Deflation in U.S. History?
• The Greatest Generation
• U.S. Government Financial Bailouts
• Austerity: When the Government Tightens Its Belt
• The New Deal
• The Economic Effects of the New Deal
• Gold Reserve Act of 1934
• Emergency Banking Act of 1933

Madelyn Goodnight / Investopedia

Business cycles are a type of fluctuation found in the aggregate economic activity of a nation—a cycle that consists of expansions occurring at about the same time in many economic activities, followed by similarly general contractions. This sequence of changes is recurrent but not periodic.

The business cycle is also called the economic cycle .

Key Takeaways

• Business cycles are composed of concerted cyclical upswings and downswings in the broad measures of economic activity—output, employment, income, and sales.
• The alternating phases of the business cycle are expansions and contractions.
• Contractions often lead to recessions, but the entire phase isn't always a recession.
• Recessions often start at the peak of the business cycle—when an expansion ends—and end at the trough of the business cycle, when the next expansion begins.
• The severity of a recession is measured by the three Ds: depth, diffusion, and duration.

Understanding the Business Cycle

In essence, business cycles are marked by the alternation of the phases of expansion and contraction in aggregate economic activity and the co-movement among economic variables in each phase of the cycle.

Aggregate economic activity is represented by not only real (i.e., inflation-adjusted) GDP —a measure of aggregate output—but also the aggregate measures of industrial production, employment, income, and sales, which are the key coincident economic indicators used for the official determination of U.S. business cycle peak and trough dates.

Popular misconceptions are that the contractionary phase is a recession and that two consecutive quarters of decline in real GDP (an informal rule of thumb) means a recession.

It's important to note that recessions occur during contractions but are not always the entire contractionary phase. Also, consecutive declines in real GDP are one of the indicators used by the NBER, but it is not the definition the organization uses to determine recessionary periods.

On the flip side, a business cycle recovery begins when that recessionary vicious cycle reverses and becomes a virtuous cycle, with rising output triggering job gains, rising incomes, and increasing sales that feedback into a further rise in output .

The recovery can persist and result in a sustained economic expansion only if it becomes self-feeding, which is ensured by this domino effect driving the diffusion of the revival across the economy.

Of course, the stock market is not the economy. Therefore, the business cycle should not be confused with market cycles , which are measured using broad stock price indices.

Measuring and Dating Business Cycles

The severity of a recession is measured by the three D's: depth, diffusion, and duration. A recession's depth is determined by the magnitude of the peak-to-trough decline in the broad measures of output, employment, income, and sales.

Its diffusion is measured by the extent of its spread across economic activities, industries, and geographical regions. Its duration is determined by the time interval between the peak and the trough.

An expansion begins at the trough (or bottom) of a business cycle and continues until the next peak, while a recession starts at that peak and continues until the following trough.

The National Bureau of Economic Research (NBER) determines the business cycle chronology—the start and end dates of recessions and expansions for the United States.

Accordingly, its Business Cycle Dating Committee considers a recession to be "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."

The Great Depression featured many recessions, one of which lasted for 44 months.

The Dating Committee typically determines recession start and end dates long after the fact. For instance, after the end of the 2007–09 recession, it "waited to make its decision until revisions in the National Income and Product Accounts [were] released on July 30 and Aug. 27, 2010," and announced the June 2009 recession end date on Sept. 20, 2010.

U.S. expansions have lasted longer than U.S. contractions on average. Between 1945 and 2019, the average expansion lasted about 65 months. The average recession lasted approximately 11 months.

Between the 1850s and World War II, the average expansion lasted about 26 months and the average recession about 21 months. The longest expansion was from 2009 to 2020, which lasted 128 months.

Stock Prices and the Business Cycle

The biggest stock price downturns tend to occur—but not always—around business cycle downturns (e.g., contractions and recessions). For example, the Dow Jones Industrial Average and the S&P 500 took steep dives during the Great Recession. The Dow fell 51.1%, and the S&P 500 fell 56.8% between Oct. 9, 2007 to March 9, 2009.

There are many reasons for this, but primarily, it is because businesses assume defensive measures and investor confidence falls during contractionary periods. Many events occur before people in an economy are aware they are in a contraction, but the stock market trails what is going on in the economy.

So, if there is speculation or rumors about a recession, mass layoffs , rising unemployment, decreasing output, or other indications, businesses and investors begin to fear a recession and act accordingly. Businesses assume defensive tactics, reducing their workforces and budgeting for an environment of falling revenues.

Investors flee to investments "known" to preserve capital, demand for expansionary investments falls, and stock prices drop.

It's important to remember that while stock prices tend to fall during economic contractions, the phase does not cause stock prices to fall—fear of a recession causes them to fall.

What Are the Stages of the Business Cycle?

In general, the business cycle consists of four distinct phases: expansion, peak, contraction, and trough.

What Does a Business Cycle Describe?

A business cycle describes the fluctuations in an economy over a period of time, generally the period from the start of one recession to the start of the next. This would include periods when the economy grows.

Are Business Cycles Predictable?

Generally, business cycles are not predictable. Economies are complex machines that function in a variety of ways and are intertwined in as many ways. The ability to predict how they will move is extremely difficult. There can be signs of changes in an economy, such as changes in inflation and production, but to predict an all-out change in the business cycle is very tough if not impossible.

The business cycle is the time it takes the economy to go through all four phases of the cycle: expansion, peak, contraction, and trough. Expansions are times of increasing profits for businesses, and rising economic output, and are the phase the U.S. economy spends the most time in. Contractions are times of decreasing profits and lower output and are the phase in which the least amount of time is spent.

Federal Reserve Bank of St. Louis. " All About the Business Cycle: Where Do Recessions Come From? "

The National Bureau of Economic Research. " Business Cycle Dating ."

National Bureau of Economic Research. " The NBER's Recession Dating Procedure ."

Congressional Research Service. " Introduction to U.S. Economy: The Business Cycle and Growth ," Page 1.

National Bureau of Economic Research. " Business Cycle Dating Committee, National Bureau of Economic Research ."

Congressional Research Service. " Introduction to U.S. Economy: The Business Cycle and Growth ," Page 2.

Federal Reserve Bank of Atlanta. " Stock Prices in the Financial Crisis ."

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What Is the Business Cycle?

How Does the Business Cycle Work?

The four phases of the business cycle, example of a business cycle, what influences the business cycle, frequently asked questions (faqs).

The Balance

The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle is a useful tool for analyzing the economy and can help you make better financial decisions.

The business cycle is a term used by economists to describe the increase and decrease in economic activity over time, with four phases from expansion to trough. The economy is all activities that produce, trade, and consume goods and services within the U.S.—such as businesses, employees, and consumers. Thus, the measured amount of productivity is what the business cycle refers to.

Key Takeaways

• The business cycle goes through four major phases: expansion, peak, contraction, and trough. 
• All economies go through this cycle, though the length and intensity of each phase varies. 
• The Federal Reserve helps to manage the cycle with monetary policy, while heads of state and governing bodies use fiscal policy.
• Consumer and investor confidence play roles in influencing economic performance and the phases in the cycle.

When businesses are increasing production, they need more employees. As a result, more people are hired, there is more money to spend, and businesses make more profits and can focus on growth . The rate at which production and consumption change positively is called economic expansion. It continues until circumstances occur that cause production to slow.

If business production slows, not as many employees are needed. As a result, consumers have less spending money, and businesses reduce spending on growth. The rate at which production and consumption as a whole change negatively is called economic contraction.

The duration of a business cycle is the period containing one expansion and contraction in sequence. One complete business cycle has four phases: expansion, peak, contraction , and trough. They don’t occur at regular intervals or lengths of time, but they do have recognizable indicators.

It's important to understand that there are mini-fluctuations within an economic phase that can make it appear as if the economy is transitioning to another phase. The National Bureau of Economic Research (NBER) determines which cycle the economy is in using quarterly gross domestic product (GDP) growth rates. It also uses monthly economic indicators, such as employment, real personal income, industrial production, and retail sales.

While you'll hear speculation in the media about the state of the economy, there is no official notice of what cycle the economy is in until it's already in progress—or complete—and the NBER has had a chance to analyze the data and declare it.

Three factors can contribute to each phase of the business cycle: the forces of supply and demand, the availability of capital, and consumer and investor confidence. Confidence in the future plays a key role. When consumers and investors have faith in the future and policymakers, the economy tends to expand. It does the opposite when confidence levels drop.

A business cycle typically goes through four phases before it's complete: expansion, peak, contraction, and trough.

An economic expansion is a period of growth throughout an economy. Because productivity is increasing, it is generally represented on a curve as an upward movement. In some cases, the expansion phase is also known as the economic recovery phase because it occurs after the economy has contracted for a long period.

Gross domestic product is the measurement often used to gauge economic output. During the expansion phase, GDP increases. Economists consider a GDP growth rate range of around 2% to be healthy.

The Federal Reserve's goal is to keep inflation, the measurement of the change in prices, at around 2%—also considered healthy by economists and officials.

In an expansion, the stock market experiences rising prices, and investors are confident. Businesses receive more funding and make more, and consumers have more money to spend. An economy can remain in the expansion phase for years.

The expansion phase nears its end when the economy begins to grow too fast. This is called overheating—the unemployment rate is well below the natural rate, and inflation is increasing. Stock market investors are in a state of irrational exuberance , where they become overly enthusiastic about prices and believe they will continue to rise. This causes stock prices to rise to a point where they are very overvalued.

The peak is the second phase of the cycle. It occurs when all of the expansionary indicators begin to level off before heading into a contraction. The economy might take weeks or a year to transition into the contraction phase. The GPD growth rate falls below 2% and continues to decline. The peak is displayed on a graph as the highest portion of the curve before moving downward.

Contraction

The third phase is the contraction stage. It begins after the economy peaks and ends when GDP and other indicators cease to decrease. In this stage, the economy does not experience growth; instead, it shrinks. When the GDP rate turns negative, the economy enters a recession. Businesses lay off employees, the unemployment rate rises above normal levels, and prices begin to decline.

A contraction is generally portrayed on a graph as the part of the curve that is consistently decreasing.

The trough is the fourth phase of the business cycle. The declining GDP begins to decrease its rate of negative change, eventually turning positive again. The economy begins a transition from the contraction phase to the expansion phase. A trough is displayed on a graph as the lowest point of the curve. The business cycle begins again when GDP begins to increase, and the curve moves upward consistently.

The business cycle's four phases can be so severe that they have been called the boom-and-bust cycle .

The peak that preceded the 2008 recession occurred in the third quarter of 2007 when GDP growth was 2.4%. The 2008 recession was a rough one because the economy immediately contracted by 1.6% in the first quarter of 2008. It rebounded 2.3% in the second quarter, an optimistic sign. However, it contracted 2.1% in the third quarter and then 8.5% in the fourth quarter. In the first quarter of 2009, it contracted by 4.6%.

During 2008, the unemployment rate rose from 4.9% in January to 7.2% by December.

The trough occurred at the end of the second quarter of 2009, according to the NBER. GDP only contracted by 0.7%. Unemployment, however, rose to 10.2% by October 2009 because it is a lagging indicator.

The expansion phase started in the third quarter of 2009 when GDP rose 1.5%. Four years into the expansion phase, the unemployment rate was still above 7%, because the contraction phase moved the economy so low that it took much longer to recover.

The government monitors the business cycle, and legislators attempt to influence it by implementing tax and spending changes. When the economy is expanding, taxes can be increased, and spending can be decreased. If it's contracting, the government can lower taxes and increase spending. This is called fiscal policy .

The Federal Reserve, the nation's central bank, influences the business cycle by influencing inflation and unemployment with targeted rates. It uses tools designed to change interest rates, lending, and borrowing by businesses, banks, and consumers. This is called monetary policy .

The Fed lowers its target interest rates to encourage borrowing in attempts to end a contraction or trough. This is called expansionary monetary policy because they are attempting to push the business cycle back into the expansionary phase.

To keep the economy from growing too quickly, the central bank raises its target interest rates to discourage borrowing and spending. This is called contractionary monetary policy because the bank is trying to contract economic output to keep expansion under control.

The goal of fiscal and monetary policy is to keep the economy growing at a sustainable rate while creating enough jobs for everyone who wants one, and ensuring that inflation does not get out of control.

What is the business cycle in simple words?

The business cycle describes an economy's cycle of growth and decline.

What are the four stages of the business cycle?

The four stages of the business cycle are expansion, peak, contraction, and trough.

National Bureau of Economic Research. " The NBER's Business Cycle Dating Committee ."

National Bureau of Economic Research. " The NBER's Business Cycle Dating Procedure: Frequently Asked Questions ."

Congressional Research Service. " Introduction to U.S. Economy: The Business Cycle and Growth ."

Federal Reserve Bank of San Francisco. " Confidence and the Business Cycle ." Page 4.

Stanford University. " The Facts of Economic Growth ."

Federal Reserve. " What Economic Goals Does the Federal Reserve Seek To Achieve Through Its Monetary Policy? "

Federal Reserve Bank of St. Louis. " Asset Bubbles: Detecting and Measuring Them Are Not Easy Tasks ."

The Conference Board. " What Are Business Cycles and How Are They Measured? (Simplified) ."

International Monetary Fund. " Recession: When Bad Times Prevail ."

Boston College University. " What Are the Sources of Boom-Bust Cycles? " Page 1.

Bureau of Economic Analysis. " National Data: National Income and Product Accounts: Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product ."

Bureau of Labor Statistics. " The Employment Situation: December 2008 ."

Bureau of Labor Statistics. " The Employment Situation: January 2008 ."

National Bureau of Economic Research. " Business Cycle Dating Committee, National Bureau of Economic Research, September 20, 2010 ."

Bureau of Labor Statistics. " Unemployment in October 2009 ."

Bureau of Labor Statistics. " Labor Force Statistics From the Current Population Survey ," Set range from 2007 to 2013.

Congressional Research Service. " Introduction to U.S. Economy: Fiscal Policy ," Pages 1-2.

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Business Cycle

Published on :

21 Aug, 2024

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Dheeraj Vaidya

Business Cycle Definition

The business cycle refers to the alternating phases of economic growth and decline. Since the phases are recurring, they often occur in an identifiable pattern where one phase usually follows the other.

This cyclical nature of the economy is taken into account when policymakers make major decisions. Just because the cycles are repetitive doesn't mean they can be avoided. The fluctuations are caused by parameters like GDP, production, employment, aggregate demand, real income , and consumer spending. Business cycles are also called trade cycles or economic cycles.

Table of contents

Business cycle in economics explained, business cycle phases with graph.

• Example of Business Cycle 

Limitations

Frequently asked questions (faqs), recommended articles.

• A business cycle is the repetitive economic changes that take place in a country over a period. It is identified through the variations in the GDP along with other macroeconomics indexes.
• The four phases of the business cycle are expansion, peak, contraction, and trough.
• The risk and adverse effects of the phases can be mitigated through wisely devising monetary and fiscal policies.
• The National Bureau of Economic Research (NBER) in the US has formed a Businss Cycle Dating Committee (BCDC) for recognizing, tracking, and reporting the different economic phases.

A business cycle is a macroeconomic oscillation that affects the nation's growth and productivity. They are also called trade cycles or economic cycles. NBER is a US-based non-profit organization. It is a private non-partisan research organization. The National Bureau of Economic Research (NBER) identifies and gauges the economic cycle. It has a Business Cycle Dating Committee responsible for keeping the chronological record of the economic stages. To determine economic conditions NBER uses the following parameters; GDP, production, employment, aggregate demand, real income, and consumer spending.

The Keynesian economic theory emphasizes the impact of demand on the business cycle. It believes that the government needs to correct the economic deflation and attain a full employment level when the aggregate demand shifts to the left. Moreover, the Real Business Cycle (RBC) and New Classical economics suggest that the economy reaches a new equilibrium whenever there is a shift in the aggregate supply. Ultimately the economy has a self-healing mechanism and doesn't require government intervention.

Every capitalist economy repeatedly goes through the different phases of the business cycle, i.e., expansion, peak, contraction, and trough. Although these ups and downs in the economy may correct by themselves in the long run, the government and the central bank use economic policies to reduce the impact of trade cycle fluctuations. At the same time, the central bank can inject expansionary or contractionary monetary policies like interest rate changes or supply of money. Further, to mitigate fluctuations, the government uses fiscal policy tools like tax rates and government spending. These measures are taken to avoid risky situations like stagflation or hyperinflation.

A country keeps track of the trade cycle to ensure that the economy is on the path of growth, unemployment steeps down, and the inflation rate remains under control. To understand the economic fluctuations and pattern, let us have a look at the following graph:

An economy is expected to have constant growth, represented by the growth trend line. In reality, though, the economy is unstable. National output goes up and down periodically. It expands to touch the peak and contracts down to the trough.

Thus, a trade cycle consists of the following four phases:  

• Expansion : When a nation's GDP shows an upward move or recovers with time, this period of growth is remarked as economic expansion. During this phase, the various economic indicators like consumer spending, income, demand, supply, employment, output, and business returns shoot up.
• Peak : During the expansion phase, the GDP spikes to its highest level; this is considered the economy's peak. At this point, economic factors like income, consumer spending, and employment level remain constant.
• Contraction : Next comes the phase of economic slowdown; it occurs when the stagnant peak GDP starts tumbling down towards the trough. With this, the nation's production, employment level, demand, supply, income level, and other economic parameters plummet.
• Trough : This is the stage at which the GDP and other economic indicators are at their lowest. During this phase, the economy gets stuck at a negative growth rate. Additionally, the demand for goods and services reduces.

Example of Business Cycle 

Nigeria is one of the largest economies in Africa. Yet, Nigeria's economy contracted by almost 1.92% in the second and third quarter of 2020 amidst the Covid 19 Pandemic. According to Reuters, this trashed the nation's GDP that grew by nearly 2.2% in 2019, after recovering from 2016's contraction.

 The reason behind this trade cycle fluctuation was the fall in demand and prices of crude oil globally. The lockdown and Covid measures imposed in many countries hit hard. Manufacturing, aviation, trade, hospitality, transportation, and many other industrial sectors slowed down. These industries directly or indirectly needed crude oil, the demand for the commodity dropped.

However, this contraction was short-lived; Nigeria showed a recovery in the last quarter of 2020 as Covid restrictions were eased out to some extent. According to the National Bureau of Statistics (NBS), the nation's growth rate was up by 0.11% in the fourth quarter of 2020. In contrast, the non-oil sectors like food manufacturing, telecom, construction, crop production, and real estate marked a phenomenal growth of 1.69% during the same period.

The effect of the pandemic on Nigeria was not as harsh as IMF anticipated. The contraction was only 3.2%. Subsequently, by 2021 the IMF assumes a 1.5% growth in the nation's economy.

Predicting the business cycle phase is crucial for policymakers and governments so that they can deal with deflation and inflation accordingly. The cycle also warns investors, owners, consumers, and strategists. However, the following are the disadvantages associated with the business cycle:

• Limited Information : Since the economic cycle analysis is based on research, it becomes difficult for economists to access complete and accurate data. Moreover, the process of correlating and interpreting acquired information is equally challenging.
• Two Contrasting Models : The Keynesian theories consider money supply to be the important factor behind fluctuations. But the Real Business Cycle theory opposes this concept and proposes that market imperfection is the important factor behind fluctuations.
• Human Glitch : Economic researchers are humans; they are the ones who study trade cycle trends and present economic indicators that cause the trend. Thus, this analysis is prone to human errors.

A business cycle refers to the long-term fluctuations in the economic output of a nation. In other words, it is the upswing or downfall of a country's GDP.  This is also applied to a particular product or a segment of the market.

The changing Gross Domestic Product (GDP) of any nation triggers the fluctuations. The GDP itself rises or falls due to the impact of various demand factors like monetary policy, credit cycle, consumer confidence, housing prices, accelerator effect, multiplier effect, income effect, and exchange rate. The economy is affected by the following supply factors: population, financial instability, lending cycle, unemployment, labor market condition, technological changes, and inventory cycle.

A typical business cycle persists for 5.5 years on average; however, it may be shorter or longer than this. While the economy self-corrects over time, various monetary and fiscal policy measures are implemented to create economic balance.

This has been a guide to Business Cycle and its Definition. Here we discuss 4 phases of the business cycle in economics using graphs and examples. You can learn more about economics from the following articles -

• Formula of Operating Cycle
• Accounting Cycle
• Formula of Cash Conversion Cycle
• Accounts Payable Cycle

Business Life Cycle

The five stages of a business' life

What is the Business Life Cycle?

The business life cycle is the progression of a business in phases over time and is most commonly divided into five stages: launch, growth, shake-out, maturity, and decline. The cycle is shown on a graph with the horizontal axis as time and the vertical axis as dollars or various financial metrics. In this article, we will use three financial metrics to describe the status of each business life cycle phase, including sales , profit , and cash flow .

Image: CFI’s FREE Corporate Finance Class .

Phase One: Launch

Each company begins its operations as a business and usually by launching new products or services . During the launch phase, sales are low but slowly (and hopefully steadily) increasing. Businesses focus on marketing to their target consumer segments by advertising their comparative advantages and value propositions. However, as revenue is low and initial startup costs are high, businesses are prone to incur losses in this phase.

In fact, throughout the entire business life cycle, the profit cycle lags behind the sales cycle and creates a time delay between sales growth and profit growth. This lag is important as it relates to the funding life cycle, which is explained in the latter part of this article.

Finally, the cash flow during the launch phase is also negative but dips even lower than the profit. This is due to the capitalization of initial startup costs that may not be reflected in the business’ profit but that are certainly reflected in its cash flow.

Phase Two: Growth

In the growth phase, companies experience rapid sales growth. As sales increase rapidly, businesses start seeing profit once they pass the break-even point. However, as the profit cycle still lags behind the sales cycle, the profit level is not as high as sales. Finally, the cash flow during the growth phase becomes positive, representing an excess cash inflow.

Phase Three: Shake-out

During the shake-out phase, sales continue to increase, but at a slower rate, usually due to either approaching market saturation or the entry of new competitors in the market . Sales peak during the shake-out phase. Although sales continue to increase, profit starts to decrease in the shake-out phase. This growth in sales and decline in profit represents a significant increase in costs. Lastly, cash flow increases and exceeds profit.

Phase Four: Maturity

When the business matures, sales begin to decrease slowly. Profit margins get thinner, while cash flow stays relatively stagnant. As firms approach maturity, major capital spending is largely behind the business, and therefore cash generation is higher than the profit on the income statement .

However, it’s important to note that many businesses extend their business life cycle during this phase by reinventing themselves and investing in new technologies and emerging markets. This allows companies to reposition themselves in their dynamic industries and refresh their growth in the marketplace.

Phase Five: Decline

In the final stage of the business life cycle, sales, profit, and cash flow all decline. During this phase, companies accept their failure to extend their business life cycle by adapting to the changing business environment. Firms lose their competitive advantage and finally exit the market.

Corporate Funding Life Cycle

In the funding life cycle, the five stages remain the same but are placed on the horizontal axis. Across the vertical axis is the level of risk in the business; this includes the level of risk of lending money or providing capital to the business.

While the business life cycle contains sales, profit, and cash as financial metrics, the funding life cycle consists of sales, business risk, and debt funding as key financial indicators. The business risk cycle is inverse to the sales and debt funding cycle.

At launch, when sales are the lowest, business risk is the highest. During this phase, it is impossible for a company to finance debt due to its unproven business model and uncertain ability to repay debt. As sales begin to increase slowly, the corporations’ ability to finance debt also increases.

As companies experience booming sales growth, business risks decrease, while their ability to raise debt increases. During the growth phase, companies start seeing a profit and positive cash flow, which evidences their ability to repay debt.

The corporations’ products or services have been proven to provide value in the marketplace. Companies at the growth stage seek more and more capital as they wish to expand their market reach and diversify their businesses.

During the shake-out phase, sales peak. The industry experiences steep growth, leading to fierce competition in the marketplace. However, as sales peak, the debt financing life cycle increases exponentially. Companies prove their successful positioning in the market, exhibiting their ability to repay debt. Business risk continues to decline.

As corporations approach maturity, sales start to decline. However, unlike the earlier stages where the business risk cycle was inverse to the sales cycle, business risk moves in correlation with sales to the point where it carries no business risk. Due to the elimination of business risk, the most mature and stable businesses have the easiest access to debt capital.

In the final stage of the funding life cycle, sales begin to decline at an accelerating rate. This decline in sales portrays the companies’ inability to adapt to changing business environments and extend their life cycles.

Understanding the business life cycle is critical for investment bankers, corporate financial analysts, and other professionals in the financial services industry. You can benefit by checking out the additional information resources that CFI offers, such as those listed below.

Additional Resources

Thank you for reading this guide on the 5 stages of a business or industry life cycle. To help you advance your career, check out the additional CFI resources below:

• Corporate Development
• Careers in Corporate Development
• Diffusion of Innovation
• M&A Process Overview
• See all valuation resources
• See all commercial lending resources
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What is Business Cycles? Phases, Types, Theory, Nature

• Post last modified: 1 August 2021
• Reading time: 40 mins read
• Post category: Economics

What is the Business Cycle?

Business Cycle , also known as the  economic cycle  or  trade cycle , is the fluctuations in economic activities or rise and fall movement of gross domestic product (GDP) around its long-term growth trend.

No era can stay forever. The economy too does not enjoy same periods all the time. Due to its dynamic nature, it moves through various phases.

Table of Content

• 1 What is the Business Cycle?
• 2 Business Cycle Definition
• 3.1 Expansion
• 3.3 Contraction
• 4.1 Cyclical nature
• 4.2 General nature
• 5 Types of Business Cycle
• 6.1 Hawtrey Monetary Theory
• 6.2 Innovation Theory
• 6.3 Keynesian Theory
• 6.4 Hicks Theory
• 6.5 Samuelson theory
• 7 Business Economics Tutorial

The change in business activities due to fluctuations in economic activities over a period of time is known as a business cycle . Business cycle are also called trade cycle or economic cycle. Business Cycle  can also help you make better financial decisions. 

The economic activities of a country include total output, income level, prices of products and services, employment, and rate of consumption. All these activities are interrelated; if one activity changes, the rest of them also change.

Also Read: What is Economics?

Business Cycle Definition

Arthur F. Burns and Wesley C. Mitchel defined business cycle definition as

Business cycle are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycle vary from more than one year to ten or twelve years; they are not divisible into shorter cycle of similar characteristics with amplitudes approximating their own. Arthur F. Burns & Wesley C. Mitchel

Also Read: What is Demand in Economics

Phases of Business Cycle

4 Phases of Business Cycle are:

Contraction

Let us discuss 4 phases of business cycle in detail:

Expansion is the first phase of a business cycle . It is often referred to as the growth phase .

In the expansion phase, there is an increase in various economic factors, such as production, employment, output, wages, profits, demand and supply of products, and sales. During this phase, the focus of organisations remains on increasing the demand for their products/services in the market.

The expansion phase is characterised by:

• Increase in demand
• Growth in income
• Rise in competition
• Rise in advertising
• Creation of new policies
• Development of brand loyalty

In this phase, debtors are generally in a good financial condition to repay their debts; therefore, creditors lend money at higher interest rates. This leads to an increase in the flow of money.

In the expansion phase, due to increase in investment opportunities, idle funds of organisations or individuals are utilised for various investment purposes. The expansion phase continues till economic conditions are favourable.

Peak is the next phase after expansion. In this phase, a business reaches at the highest level and the profits are stable. Moreover, organisations make plans for further expansion.

Peak phase is marked by the following features:

• High demand and supply
• High revenue and market share
• Reduced advertising
• Strong brand image

In the peak phase, the economic factors, such as production, profit, sales, and employment, are higher but do not increase further.

An organisation after being at the peak for a period of time begins to decline and enters the phase of contraction. This phase is also known as a recession .

An organisation can be in this phase due to various reasons, such as a change in government policies, rise in the level of competition, unfavourable economic conditions, and labour problems. Due to these problems, the organisation begins to experience a loss of market share.

The important features of the contraction phase are:

• Reduced demand
• Loss in sales and revenue
• Reduced market share
• Increased competition

In Trough phase, an organisation suffers heavy losses and falls at the lowest point. At this stage, both profits and demand reduce. The organisation also loses its competitive position.

The main features of this phase are:

• Lowest income
• Loss of customers
• Adoption of measures for cost-cutting and reduction
• Heavy fall in market share

In this phase, the growth rate of an economy becomes negative. In addition, in trough phase, there is a rapid decline in national income and expenditure.

After studying the business cycle , it is important to study the nature of business cycle .

Read: Difference Between Micro and Macro Economics

Nature of Business Cycle

The nature of business cycle helps the organisation to be prepared for facing uncertainties of the business environment.

Cyclical nature

General nature.

Let us discuss the nature of business cycle in detail.

This is the periodic nature of a business cycle. Periodicity signifies the occurrence of business cycle at regular intervals of time. However, periods of intervals are different for different business cycle . There is a general consensus that a normal business cycle can take 7 to 10 years to complete.

The general nature of a business cycle states that any change in an organisation affects all other organisations too in the industry. Thus, general nature regards the business world as a single economic unit.

For example, depression moves from one organisation to the other and spread throughout the industry. The general nature is also known as synchronism.

Read: What is Business Economics?

Types of Business Cycle

Following the writings of Prof .James Arthur and Schumpeter, we can classify business cycle into three types based on the underlying time period of existence of the cycle as follows:

• Short Kitchin Cycle
• Longer Juglar cycle
• Very long Kondratieff Wave

Short Kitchin Cycle (very short or minor period of the cycle, approximately 40 months duration)

Longer Juglar cycle (major cycles, composed of three minor cycles and of the duration of 10 years or so)

Very long Kondratieff Wave (very long waves of cycle, made up of six major cycles and takes more than 60 years to run its course of duration)

Also Read: Scope of Economics

Business Cycle Theory

A business cycle is a complex phenomenon which is common to every economic system. Several theories of business cycle have been propounded from time to time to explain the causes of business cycle.

Business Cycle Theory are:

Hawtrey Monetary Theory

Innovation theory.

• Keynesian theory

Hicks Theory

Samuelson theory.

Hawtray was of opinion that in depression monetary factors play a critical role. The main factor affecting the flow of money and money supply is the credit position by the bank. He made the classical quantity theory of money as the basis of his trade cycle theory .

According to him, both monetary and non-monetary factors also affect trade. His theory is basically the product of the supply of money and expansion of credit. This expansion of credit and other money supply instrument create a cumulative process of expansion which in return increase aggregate demand.

According to this theory the only cause of fluctuations in business is due to instability of bank credit. So it can be concluded that Hawtray’s theory of business cycle is basically depend upon the money supply, bank credits and rate of interests.

Criticism of this Business Cycle theory

• Hawtray neglected the role of non-monetary factors like prosperous agriculture, inventions, rate of profit and stock of capital.
• It only concentrates on the supply of money.
• Increase in interest rates is not only due to economic prosperity but also due to other factors.
• Over-emphasis on the role of wholesalers.
• Too much confidence in monetary policy. vi. Neglect the role of expectations. vii. Incomplete theory of trade cycles.

The innovation theory of business cycle is invented by an American Economist Joseph Schumpeter. According to this theory, the main causes of business cycle are over-innovations.

He takes the meaning of innovation as the introduction and application of such techniques which can help in increasing production by exploiting the existing resources, not by discoveries or inventions. Innovations are always inspired by profits. Whenever innovations are introduced it results into profitability then shared by other producers and result in a decline in profitability.

• Innovation fails to explain the period of boom and depression.
• Innovation may be major factor of investment and economic activities but not the complete process of trade cycle.
• This theory is based on the assumption that every new innovation is financed by the banks and other credit institutions but this cannot be taken as granted because banks finance only short term loans and investments.

Keynesian Theory

The theory suggests that fluctuations in business cycle can be explained by the perceptions on expected rate of profit of the investors. In other words, the downswing in business cycle is caused by the collapse in the marginal efficiency of capital, while revival of the economy is attributed to the optimistic perceptions on the expected rate of profit.

Moreover, Keynesian multiplier theory establishes linkages between change in investment and change in income and employment. However, the theory fails to explain the cumulative character both in the upswing and downswing phases of business cycle and cyclical fluctuations in economic activity with the passage of time.

Hicks extended the earlier multiplier-accelerator interaction theory by considering real world situation. In reality, income and output do not tend to explode; rather they are located at a range specified by the upper ceiling and lower floor determined by the autonomous investment.

In the theory, it is assumed that autonomous investment tends to grow at a constant percentage rate over the long run, the acceleration co-efficient and multiplier co-efficient remain constant throughout the different phases of the trade cycle, saving and investment co-efficient are such that upward movements take away from equilibrium.

The actual output fails to adjust with the equilibrium growth path overtime. In fact it has a tendency to run above it and then below it, and thereby, constitute cyclical fluctuations overtime. This basic intuition can be shown with the help of the following figure.

• Wrong assumption of constant multiplier and acceleration co-efficient.
• Highly mechanical and mathematical device.
• Wrong assumption of no-excess capacity.
• Full-employment ceiling is not independent

According to this theory process of multiplier starts working when autonomous investment takes place in the economy. With the autonomous investment income of the people rises and there is increase in the demand of consumer goods. It directly affected the marginal propensity to consume.

If there is no excess production capacity in the existing industry then existing stock of capital would not be adequate to produce consumer goods to meet the rising demand. Now in order to meet the consumer’s requirements, producers will make new investment which is derived investment and the process of acceleration principle comes into operation.

Then there is rise in income again which in the same manner continue the process of income propagation. So in this way multiplier and acceleration interact and make the income grow at faster rate than expected. After reaching its peak, income comes down to bottom and again start rising.

Autonomous investment is incurred by the government with the objective of social welfare. It is also called public investment. The autonomous investment is the investment which is done for the sake of new inventions in techniques of production.

Derived investment is the investment undertaken in capital equipment which is induced by increase in consumption.

• This model only concentrates on the impact of the multiplier and acceleration and it ignored the role of producer’s expectations, changing business requirements and consumers preferences etc.
• It is not practically possible to compute the fact of multiplier and acceleration principle.
• It has wrong assumption of constant capital output ratio.

Also Read: What is Law of Supply?

• D N Dwivedi, Managerial Economics , 8th ed, Vikas Publishing House
• Petersen, Lewis & Jain, Managerial Economics , 4e, Pearson Education India
• Brigham, & Pappas, (1972). Managerial economics , 13ed. Hinsdale, Ill.: Dryden Press.
• Dean, J. (1951). Managerial economics (1st ed.). New York: Prentice-Hall.

Business Economics Tutorial

( Click on Topic to Read )

• What is Economics?
• Scope of Economics
• Nature of Economics
• What is Business Economics?
• Micro vs Macro Economics
• Laws of Economics
• Economic Statics and Dynamics
• Gross National Product (GNP)
• What is Business Cycle?
• W hat is Inflation?
• What is Demand?
• Types of Demand
• Determinants of Demand 
• Law of Demand
• What is Demand Schedule?
• What is Demand Curve?
• What is Demand Function?
• Demand Curve Shifts
• What is Supply?
• Determinants of Supply
• Law of Supply
• What is Supply Schedule?
• What is Supply Curve?
• Supply Curve Shifts
• What is Market Equilibrium?

Consumer Demand Analysis

• Consumer Demand
• Utility in Economics
• Law of Diminishing Marginal Utility
• Cardinal and Ordinal Utility
• Indifference Curve
• Marginal Rate of Substitution
• Budget Line
• Consumer Equilibrium
• Revealed Preference Theory

Elasticity of Demand & Supply

• Elasticity of Demand
• Price Elasticity of Demand
• Types of Price Elasticity of Demand

Factors Affecting Price Elasticity of Demand

• Importance of Price Elasticity of Demand
• Income Elasticity of Demand
• Cross Elasticity of Demand
• Advertisement Elasticity of Demand
• Elasticity of Supply

Cost & Production Analysis

• Production in Economics
• Production Possibility Curve
• Production Function
• Types of Production Functions
• Production in the Short Run
• Law of Diminishing Returns
• Isoquant Curve
• Producer Equilibrium
• Returns to Scale

Cost and Revenue Analysis

• Types of Cost
• Short Run Cost
• Long Run Cost
• Economies and Diseconomies of Scale
• What is Revenue?

Market Structure

• Types of Market Structures
• Profit Maximization
• What is Market Power?
• Demand Forecasting
• Methods of Demand Forecasting
• Criteria for Good Demand Forecasting

Market Failure

• What Market Failure?
• Price Ceiling and Price Floor

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Did we miss something in Business Economics Tutorial? Come on! Tell us what you think about our article on Business Cycle | Business Economics in the comments section.

• What is Inflation?
• Determinants of Demand

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• Features of Business Cycles

What is the Business Cycle?

The Business Cycle refers to the vast Economic fluctuations in trade, production, and general Economic activities. The Business Cycle is also known as the boom-bust Cycle or Economic Cycle. If we look at it conceptually then, the Business Cycle refers to the up and down movements of the GDP and refers to widespread expansions and contractions in the level of Economic booming and activities. 

The Business Cycle graph is never constant. Depending on the Economic standout, the rise and fall of the curve occur. The features of the Business Cycle have different phases. Business Cycles are identified into four distinct phases: Expansion, Peak, Contraction, and Trough.

What are the Features and Phases of a Business Cycle? 

As mentioned earlier, there are four different phases of the Business Cycle; all these phases have different features of the Business Cycle. 

Expansion: Expansion is characterized by employment increase, Economic growth, and rise in prices.

Peak: Peak is considered to be the highest point in the Business Cycle. A Business Cycle is said to have reached a peak when there is maximum output, employment is full or near to full employment, and inflationary prices are somewhat evident. 

Contraction: Once the peak is reached, the Economy usually enters into the contraction phase. In this phase, the growth slows down and unemployment increases. 

Trough: The contraction then hits the trough point, and it is at this time that the Economy has its bottom. Once again, the Economy will hit bottom, and the next phase of expansion and contraction will start. 

What are the Features of a Business Cycle? 

There are several features of a Business Cycle. Let us take a look at five features of a Business Cycle. 

Occurs Periodically: The different phases of a Business Cycle occur from time to time. Although, at certain times, these periods will vary according to the Economic conditions of the industry. This duration may last as long as 10-12 years. The intensity of the phases will also change depending on the Economy. For example, at times, the firm will see massive growth followed by a short span of depression. 

Synchronous: Another advantageous and prominent feature of the Business Cycle is that it is synchronic. The features of a Business Cycle are not restricted to a single firm or industry. They originate in a free Economy and are prevalent. If there is any kind of disturbance or Business boom in one industry, it will affect the other firms too. Since different kinds of industries are interrelated, the Business in one firm disturbs that in another firm. 

Major Sectors are Affected: It’s been noticed that fluctuations occur not only at the level of production but also in other variables such as employment, consumption, investment, rate of interest, and price level. The investment and consumption of durable consumer goods like houses and cars are continually affected by the periodical fluctuations. As the process of consumption is deferred the courses of the Business Cycle are also affected widely. 

Profit Variation: Another significant feature of the Business Cycle is that the profits fluctuate more than any other income source. This makes any kind of Business a tricky and uncertain profession for many. It is difficult to predict Economic conditions. In situations of depression, profits may even become harmful. That is why many Businesses go bankrupt.  

Worldwide Impact: Business Cycles are international in nature. If depression occurs in one country, then it is bound to spread to other nations too. This happens mainly because the countries depend on each other for import and export trades. The 1930 depression in the USA and Great Britain shook the entire world and resulted in a recession. 

Fun Facts About Business Cycles

Business Cycles are an aggregate phenomenon. They do not affect a single Economic activity but several Economic variables. 

Expansions and recessions accompany Business Cycles. 

Although Business Cycles are recurrent, they are not periodic. They often occur at regular intervals but not at a fixed duration. It is therefore tough to predict times of recession. 

The expansion and contraction phases can have different durations. The amplitude of both phases doesn't need to be the same or equal. 

Business Cycle Characteristics

There is no such thing as a straight line in any Economy. They all go through Cycles of Economic expansion and decline. The Economic climate is extremely dynamic, and it has a considerable impact on Business enterprises. There are some traits that all of these Business Cycles have in common. So, let's have a look at the characteristics of Business Cycles.

Cycle of Business

The Business Cycle is the natural expansion and contraction of goods and service production and output over a period of time. It can be defined as the rise and collapse of a Business in the Economy.

It is, above all, a tool for understanding the firm's and the Economy's Economic conditions. This analysis can be used by the company to make appropriate policy adjustments.

Business Cycle Phases include:

Business Cycles have various phases, which may be studied to learn more about their underlying causes. These phases have been referred to by various economists under various titles.

The Following Business Cycle Phases Have Been Identified In General:

1. Expansion is number one (Boom, Upswing or Prosperity)

2. The pinnacle (upper turning point)

3. Reduction in size (Downswing, Recession or Depression)

4. Lower turning point

In Fig. 13.1, the four phases of Business Cycles are depicted, beginning with the trough or depression, when Economic activity, i.e., production and employment, is at its lowest point.

(Image will be Uploaded soon)

The Economy enters the growth phase with the revival of Economic activity, but owing to the reasons stated below, the expansion cannot last indefinitely, and after reaching its peak, contraction or downswing begins. We have depression when the contraction picks up speed.

Expansion, peak, depression, and recovery are the four stages of a Business Cycle. While each phase has its own distinct traits, there are some aspects that are shared by all stages. Take a look at these characteristics of Business Cycles.

Business Cycle Features:

1. Business Cycles occur on a regular basis. They feature identifiable phases such as expansion, peak, contraction, depression, and trough, albeit they do not show the same regularity. In addition, Cycle duration varies greatly, from a minimum of two years to a maximum of 10 to twelve years.

2. Business Cycles are also synchronised. That is, they have an all-encompassing nature and do not affect just one industry or area. Depression or contraction, for example, might occur in any industry or sector of the Economy at the same time.

3. Finally, changes have been found not only in the level of output but also in other variables such as employment, investment, consumption, interest rate, and price level.

FAQs on Features of Business Cycles

What Causes the Business Cycle?

Supply and demand forces are the primary drivers of the Business Cycle. This is accompanied by capital availability, future expectations, and GDP growth. In general, the Cycle is broken into four sections. It's also referred to as the characteristics and phases of Business Cycles. Expansion, peak, contraction, and trough are the four stages. 

Any country's monetary policy affects the Economic Cycle. Changes in interest rates and money supply are made. You can read about the same in the free pdf of Features of Business Cycles from Vedantu.

What happens in the second expansion phase?

In the second expansion phase, the inflation rate is kept around 2 percent, while the banks raise the interest during the peak. Economic growth can slow down in the contraction phase, and turns negative. The trough phase is when the Economy is made to jump-start again. The proper definition, an explanation of the secondary phase in the expansion, can be checked with the help of the free PDF of the Features of Business Cycles. The monetary policy of any country changes the Economic Cycle. Interest rates and money supplies are altered. 

What is an Example of a Business Cycle?

The Business Cycle since the year 2000 is the best example. The expansion process occurred from 2000 to 2007, while the recession hit from 2007 to 2009. Initially, bank loans and mortgages were easily accessible. As a result, people began purchasing homes since they could afford loans. As a result, real estate prices began to rise. The government couldn't refuse anyone because it had guaranteed money to the banks. As a result, they began to allow consumers to take out numerous mortgages on the same property. In 2007, the level of activity peaked. People started to observe a decrease in interest rates after that. Before the end of the Cycle, there was a period of Economic recession from 2007 to 2009.

What periodically occurs in the Business Cycle?

There are different phases that occur in the Business Cycle. It happens from time to time and hence is called the periodic occurrence. Although, at times, these timeframes will fluctuate depending on the industry's Economic conditions. This period could extend anywhere from 10 to 12 years. Depending on the Economy, the intensity of the phases will also differ. For example, the company may experience rapid expansion followed by a brief period of depression.

What is synchronization in the Business Cycle? 

Synchronization is one of the prominent and most advantageous features of the Business Cycle. It is also called synchronic. A Business Cycle's characteristics are not unique to a single company or industry. They have their origins in a free market Economy and are used widely. If there is a disruption or a Business boom in one industry, it will influence the other Businesses as well. Different industries are intertwined, and the operations of one company can disrupt the operations of another.