Business Cycle

Business Cycle
Is the economy getting better or

worse?
What does the GDP tell us?
• If the GDP is larger than last year the economy is

expanding (getting bigger)
• If the GDP is smaller, the economy is shrinking (getting

smaller)
Business Cycle
• The Business Cycle allows people to understand where

the direction the economy (GDP) is going (growing or
shrinking) and plan accordingly.
Phases of the Business Cycle
Expansion (Growing)
Peak (Top)
Contraction (Shrinking)
Trough (Bottom)
Expansion
During a period of expansion:

– Wages increase
– Unemployment falls
– Consumer spending increases
– Demand for goods and services increases
– New businesses start
– Easy availability of bank loans
– Businesses make profits and stock prices increase
Peak
When the economic cycle peaks:

– The economy stops growing
– GDP reaches maximum
– Businesses can’t produce any more or hire more
people
– Cycle begins to contract
Contraction
During a period of contraction:

– Businesses cut back production and layoff people
– Unemployment increases
– Number of jobs decline
– People are pessimistic, consumer spending declines
– Banks averse in lending money
Trough
When the economic cycle reaches a trough:

– Economy “bottoms-out” (reaches lowest point)
– High unemployment and low spending
– Stock prices drop
But, when we hit bottom, no where to go but up!

UNLESS….
Recession/Depression
• A prolonged contraction is called a recession

(contraction for over 6 months)
• A recession of more than one year is called a

depression
What keeps the Business Cycle Going?
• Business Investment
When the economy is expanding, sales and profit
keep rising, so companies invest in new plants and
equipment, creating new jobs and more expansion.
In contraction, the opposite is true
• Interest Rates and Credit

Low interest rates, companies make new
investments, adding jobs. When interest rates climb,
investment dries up and less job growth
What Keeps the Business Cycle Going?
• Consumer Expectations
Forecasts of an expanding economy fuels more
spending, while fear of a recession decreases
consumer spending
• External Shocks
External Shocks, such as disruptions of the oil
supply, wars, or natural disasters greatly influence
the output of the economy. (Example-1992-2000
was the longest period of expansion in U.S. history.
Early in 2001, signs of contraction appeared, though
the Bush administration denied it. The Sept. 11th
2001 terrorist attacks quickly caused the business
cycle to shift into a contraction)
Why Care about Business
Cycle?
“Don’t quit that job!”
• If the economy is going into a contraction, jobs will
become more scarce. If you quit, you may not find
another job!
• But, if the economy is in a period of expansion, jobs are

readily available. It may be a good time to switch
careers.
“Should I make a big purchase?”
• Only if you know that you won’t lose your job in a

contraction. So, buy your house during an expansion.
HOWEVER,
• When the economy starts to slow down (contraction),

interest rates will decrease. Wait to buy a house until the
rates drop to a low point, if you are sure you won’t lose
your job.
Quick Review!
• What phase of the business cycle do wages go up?

• Expansion
• What phase of the business cycle do wages go down?

• Contraction
Quick Review!
• When are wages at their highest?

• Peak
• When are wages at their lowest?

• Trough
Quick Review!
• When will borrowing decrease?

• Contraction
• When will borrowing increase?

• Expansion
• When will borrowing be at it’s lowest?

• Trough
Quick Review!
• When will unemployment be at its lowest?
• Peak
• When will business profits be the highest?

• Peak
• When should you look for a new job?

• Expansion
Current Scenario
• https://www.channelnewsasia.com/business/japan-
panel-says-may-2020-marked-latest-business-cycle-
bottom-2348046
• https://www.businesstoday.in/latest/economy/story/
economic-recovery-suggests-kick-starting-of-investment-
cycle-to-gain-more-strength-finmin-315253-2021-12-11
• https://www.newindianexpress.com/business/2021/dec/
11/muted-iip-growth-casts-shadow-over-indias-
economic-recovery-hopes-2394317.html

Business Cycle

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Business Cycle

Is the economy getting better or

• If the GDP is larger than last year the economy is

• If the GDP is smaller, the economy is shrinking (getting

• The Business Cycle allows people to understand where

During a period of expansion:

When the economic cycle peaks:

During a period of contraction:

When the economic cycle reaches a trough:

But, when we hit bottom, no where to go but up!

• A prolonged contraction is called a recession

• A recession of more than one year is called a

• Interest Rates and Credit

• But, if the economy is in a period of expansion, jobs are

• Only if you know that you won’t lose your job in a

• When the economy starts to slow down (contraction),

• What phase of the business cycle do wages go up?

• What phase of the business cycle do wages go down?

• When are wages at their highest?

• When are wages at their lowest?

• When will borrowing decrease?

• When will borrowing increase?

• When will borrowing be at it’s lowest?

• When will business profits be the highest?

• When should you look for a new job?

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