The main Stages of the Business Cycle
- The business cycle describes the upturns and downturns in the level of a country’s economic activity (Gross Domestic Product or GDP) over time
- Economies do not experience consistent levels of growth over time
Diagram: Business Cycle
The business cycle diagram shows periods of growth, boom, recession and slump in an economy
- A recession occurs when an economy experiences two consecutive quarters (6 months) or more of negative GDP growth
- Incomes and consumer demand fall, leading to reduced output
- Consumer and business confidence tend to be low
- Business profits fall and unemployment rises
- A slump is an extended period of negative GDP growth
- Unemployment is likely to be high as a result of high levels of business failure
- Significant declines in household incomes and business profits
- Increased government spending on welfare benefits and infrastructure projects to inject demand into the economy may benefit some businesses
- The growth stage is a period of increasing rates of GDP growth
- Disposable income levels rise and lead to increased demand for products
- This drives an increase in production levels, which leads to a rise in employment levels
- Businesses look to expand and increase profit
- A boom is a period of time when an economy experiences an extended period of increasing rates of GDP growth
- Consumer incomes and business profits are high
- Inflation is also high due to higher demand for goods and services
- Unemployment levels are low and wages are high due to a shortage of skilled workers