Often when we think of a business, we think of profits and losses. What if you were told that there are four distinct stages of a business cycle that explain the increases and declines your business inevitably faces?
A business cycle refers to the fluctuations within the economy. The economy may be stable for a period of time, but one constant is the fact that the economy is always changing. Scholars and economists use indicators such as the upward and downward levels of gross domestic product (GDP) to measure and determine which stage of the business cycle the economy is experiencing.
A business cycle differs in various ways but it has four distinct and core stages: expansion, peak, contraction and trough.
Let’s go through each of these stages and apply them to a business’ profits and employment levels.
The beginning stage of a business cycle starts with an expansion when its economic indicators begin to rise after hitting the low point of the cycle’s trough. An expansion can be characterized by increasing employment, economic growth, and upward shift in prices. Businesses are making more money and can afford to increase their production of goods and services and to hire more employees.
This is when a business has reached the highest level of the cycle’s expansion stage. A peak is realized when the economy is producing at its maximum allowable output and employment is at or above full employment. An economy’s GDP is normally high during an expansion and peak which indicates that the economy is operating efficiently.
The contraction stage is the period of economic decline or negative growth. Following a peak, an economy typically enters into a correction which is characterized by a contraction. Growth slows and employment declines causing unemployment to increase. As a result, people will have less discretionary income to purchase the items that businesses produce.
The trough is the lowest point of a business cycle. The decline of growth ceases at the trough and at this point, the economy has hit a bottom from which the next phase of expansion and contraction will occur. While an economy’s GDP is lower during a business cycle’s contraction phase than it is during the expansion and peak periods, it will typically drop to its lowest point during the trough. The fiscal levels of a business have hit their lowest point and unemployment has decreased significantly. If the GDP remains low for an extended time, the trough is then known as a recession or depression.
V. Pang | DBPC Blog