Stages of the Business Cycle
The business cycle is a measurement of how an economy, and even businesses within that economy, grow and shrink over time. This cycle has distinct parts, known as stages, that typically follow a set pattern. The business cycle can be used for a variety of purposes, from analysis to economic forecasting.
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Expansion
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When an economy grows, this is known as expansion. In an expansion period, more businesses experience growth, more jobs are created and people tend to make more money. Businesses during this time period see increased sales and often have record profits. Banks and lending institutions receive a lot of applications for loans and interest rates tend to rise. With a rise in consumer demand, some products and materials may experience shortages.
Peak
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An economic peak is the time when an expansion has reached its maximum. Not only is this the point at which the economy is its strongest and most robust. At the peak of the cycle, prices for goods and services reach their highest levels and consumers have their highest level of disposable income. Eventually, the price increase, increase in interest rates and higher wages limit expansion.
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Recession
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A recession is when the economy starts shrinking. Wages decrease, jobs are lost and consumer spending decreases. With fewer people buying goods, companies experience surpluses that they cannot sell. Banks are no longer able to give as many loans as they could before and star lowering interest rates to encourage new lenders.
Trough
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A trough is to a recession as a peak is to an expansion. When an economy is in a trough, jobs are few, wages are low and consumer demand is anemic. Companies with excess inventory don't need workers to make more, and banks are practically giving money away for free to encourage borrowers. A trough is the lowest point in an economy and is followed by an expansion, thus beginning the cycle anew.
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