The business cycle refers to recurring periods of economic growth (peak/prosperity phase) and contraction (recession/contraction phase) that can last for years. During the peak, economic growth is highest, output and employment are at their maximum levels, and inflation may be high. In the recession, economic growth declines, output and employment decrease, and unemployment rises. The cycle bottoms out in the trough/depression phase, then enters a recovery/expansionary phase where growth resumes. Economists use indicators like unemployment claims and inventory levels to track changes in the business cycle and predict economic trends.

1. Business Cycle
The term business cycle refers to the recurrent ups and downs in the level of
economic activity, which extend over several years.
Peak or Prosperity Phase
 Highest period of economic growth
 Real output in the economy is at a high level
 Unemployment is low

2.  Domestic output may be at its capacity
 Inflation may be high
Recession or Contraction Phase
 Economic slowdown
 Real output is decreasing
 Unemployment rate is rising
 As contraction continues, inflation pressure fades
 If the recession is prolonged, price may decline (deflation)
 There is no precise decline in output at which a serious recession becomes a
depression

3. Trough or Depression Phase
 Prolonged recession
 Lowest point of real GDP
 Output and unemployment “bottom out”
 There is no precise decline in output at which a serious recession becomes a
depression
Expansionary or Recovery Phase
 Renewed economic growth
 Real output in the economy is increasing
 Unemployment rate is declining
 The upswing part of the cycle

4. Indicators
• Economists use changes in a variety of activities measure the business cycle,
and to try to predict where the economy is headed.
• They include:
Leading Indicators
• Variables that change before real output changes.
They include:
 Unemployment claims
 Manufacturers’ new orders
Lagging Indicators
• Variables that change after real output changes.
They include:
 Inventories to sales ratio
 Outstanding commercial loans
Characteristics
Wave like fluctuation
The periods of boom and depression occur alternatively.

5. It is recurring in nature
The four phases of trade cycle repeat themselves with somesort of regularity.
No two trade cycles are identical
The cause, impact and periodicity of two trade cycles may not be same.
Steep wall towards depression
The upward movement towards boom is slow and steady. But the downfall is steep,
sudden and often violent causing disaster all round.
Synchronic in nature
Different phases of trade cycle occur almost simultaneously in different industry.
Expansion
• phase of high growth coupled with large investments,
• increase in employment, income and expenditure,
• But that is not all about it. Expansion also comes along with inflation and
competition.
Recession
• Recession is unwarranted and creates negative implications for the economy.
• The basic problems - unemployment, excessive inventory, below capacity
operations and liquidation of firms.
Controlling business cycle
 During expansion firms gain, so desired phase & during recession firms suffer,
the unwarranted phase
 Take preventive & corrective measures to minimize their losses during recession
and to bring in stability in the economy
At Firm Level
 Investment – balanced mix of debt & equity
 Inventory – should not create large inventory, just-in-time strategy is helpful

6.  Products – diversify in different markets & different products, because in this
way risk is also diversified
 Pricing – flexibility preferred. During recession prices may be adjusted to
increase demand
At Government level
 Monetary policy
 Fiscal policy