Business Cycle (Simply Explained 2022) - YouTube

Business Cycle What is a Business Cycle?  

Business cycles mark the expansions and  contractions within a nation’s economy  

and always follow the same wave-like pattern.  

It is most often measured by the rise and fall of  a GDP or a gross domestic product in a country.  

The different phases of the business cycle can  aid individuals to make lifestyle decisions,  

investors to make financial decisions, and  governments to make necessary policy decisions.  

It’s important to note that business cycles don’t  have a set time frame. It can be extremely long  

or short, and it solely depends on the economy.  Recently, the US hit a peak in February 2020,  

right before the pandemic hit, marking the  longest period of expansion in recorded history  

that lasted a whopping 128 months. Stages of a Business Cycle  

In its lifetime, business cycles often begin  to look like a wave after time goes on.  

A sustained period of economic growth is always  followed by economic decline. This is due to the  

four identifiable phases that a business cycle  often goes through expansion, peak, contraction,  

and trough. Expansion  

Expansion is considered the most desirable phase  of the business cycle, which happens when the  

economy steadily increases and grows. During  an expansion period, businesses and companies  

continuously grow their production and profits.  During this time, the employment rate is high,  

and the unemployment rate is low. Furthermore,  the stock market will do incredibly well.  

Consumers are buying and investing, resulting  in an increased demand for national goods and  

services and rising prices. During the expansion  period, almost everything related the economics  

increased. During a healthy expansion phase,  the GDP growth rate is between 2% and 3%,  

inflation is at the 2% target, and unemployment  rests in the range of 3.5% to 4.5%.  

Peak The peak marks  

the climax of the business cycle wave, at the very  top of the expansion phase. Even though expansion  

is excellent, the economic increase cannot  continue forever. Once expansion reaches a peak,  

the economy is growing out of control.  This is when expansion is too unmanageable,  

and growth becomes reckless. In other words,  uncontrolled expansion can also be harmful.  

Investors become overconfident in the stock  market and start to buy lots of assets, directly  

leading to an increase in stock prices, which are  ultimately not supported by the underlying value.  

The cost of everything begins to increase  drastically. It happens when the expansion  

has reached its highest growth and ends,  meaning that the value of goods and services  

has reached a limit. With no more room to grow,  prices must go down, leading to contraction.  

Contraction A contraction is a time between the peak  

and the trough of the business cycle. During this  period of downfall, the economy goes down. During  

the contraction, unemployment percentages spike  due to a decline in the companies total revenue.  

When companies begin to lose money, they try  to cut costs by firing employees, resulting  

in a spiking unemployment rate. Also, stocks  began to enter a bear market during contraction.  

A bear market occurs when there’s been a  continuous fall in stocks or another asset,  

usually at least 20%. GDP growth is below  2%, which means that businesses have cut  

back on their economic activities. When the  GDP has declined for two consecutive quarters,  

the economy is considered to  be under a recession.  

Trough The trough is the lowest point in the  

business cycle wave. It occurs when the recession  or contraction phase has reached its lowest.  

After the market hits the trough, it rebounds  into an expansion phase. This is due to government  

policies and actions that come into play to  prevent a severe recession. The business cycle  

resets, and the cycle will happen all over again.  The rebound is not always super fast, but it is a  

sign of positivity because it means the economy  is recovering and expanding once again.  

Business Cycles vs. Market Cycles  

While market cycles solely focus on the stock  market, the business cycle focuses on the  

nation’s economy as a whole. The stock market  is, however, influenced by the business cycle.  

In expansion, many investors buy many stocks,  and in contraction, many investors don’t.  

Government Involvement in Business Cycles Although the business cycle is a natural phase,  

the government can still influence the  various phases. This includes slowing  

or speeding up certain business cycle stages  by using monetary policy and fiscal policy.  

The government controls fiscal policy,  whereas the central bank controls monetary  

policy. For example, when an economy is  in contraction, especially in recessions,  

governments use expansionary fiscal policy, which  increases spending on projects or cuts taxes.  

This can stimulate economic growth. The central  bank can also use expansionary monetary policy  

to end a contraction by reducing interest  rates stimulating spending and the economy.  

In spikes of expansion, the government can  also use contractionary monetary policy  

that uses cutting spending and increasing  taxes. This reduces income to spend and  

slows the economy down. The central bank can  also employ a contractionary monetary policy  

where the bank will raise interest rates, slow  down borrowing, and slow the economy.  

Key Takeaways The business cycle has four stages:  

expansion, peak, contraction, and trough.  Expansion is economic growth, and the peak  

is the highest of economic growth. Contraction  is when the economy declines, and the trough  

is the lowest part of the economic decline. The business cycle focuses on the economy  

as a whole, whereas the market cycle  focuses only on the stock market.  

The government and central bank of a nation  both have the power to alter the business cycle.  

They can use policies like the expansionary  fiscal policy, expansionary monetary policy,  

contractionary fiscal policy, and  contractionary monetary policy  

to slow down or speed up the business cycle  to maintain the nation’s economy.  

Thanks for watching Animated Finance.  

How do you use the business  cycle to your advantage?