Four Phases of the Business Cycle

Four Phases of the Business Cycle The business Cycle (or Trade Cycle) is divided into the following four phases: Prosperity Phase: Expansion or Boom or Upswing of economy Recession Phase: From prosperity to recession or downward turn Depression Phase: Contraction or Downsizing of the economy Recovery Phase: from depression to prosperity or upward turn

Prosperity Phase Rise in the standard of living High level of output and trade High level of effective demand High level of income and employment Rising interest rates Large expansion of bank credit Overall business optimism A high level of MEC (Marginal Efficiency of Capital) and investment Rise in the GNP (gross national product) Called a boom period

Recession Phase Economic activity slows Demand starts falling Overproduction of goods Steady decline in: Output Income Employment Prices and profit Businessmen loose confidence Recessions last a short time, generally

Depression Phase Fall in the standard of living Fall in output and trade Fall in income Rise in unemployment Decline in consumption and demand Fall in interest rates Deflation Contraction of bank credit Overall business pessimism Fall in MEC and investment Under-utilization of resources and fall in GNP

Recovery Phase Expansion and rise in economic activity Rise in demand Increase in investment and production Steady rise in: Output Income Employment Prices Profits Also known as the revival phase Revival slowly emerges into prosperity

Four Phases of the Business Cycle