business cycle essay introduction

Business Cycle in Economy Essay

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Appearing in last Sunday’s edition of New York Times, the article “Living on Minimum Wage” illustrates a picture of an American economy which is in the recovery phase in the business cycle. This paper illuminates some of the main ideas contained in the article.

Business cycle, also referred to as economic cycle, is a term mainly used by economics scholars and business practitioners to demonstrate the fluctuating movements (increasing or decreasing) of levels of the gross domestic product (GDP) in an economy over a particular period of time that may vary from several months to a number of years (Ball, 2009).

The recurring and fluctuating levels of the GDP an economy experiences over a certain time frame are grouped into five phases for ease of analysis – growth (economic expansion), peak, recession (economic contraction), trough and recovery (McConnell, 2009; Romer, 1999).

From the article, it is clear that the United States economy suffered under the 2008 financial crisis and many economic pundits viewed the crisis as a major triggering force for the economic contraction that was witnessed in many economies of the developed world.

The author of the article acknowledges that “the recession took middle-class jobs, and the recovery has replaced them with low-income ones, a trend that has exacerbated income inequality” (Lowrey, 2013 para. 2). The shift from middle-class jobs to low-income jobs, according to Romer (1999) is a viable indicator of the economic fluctuations in the business cycle over time.

Another major theme in the article is President Obama’s concept of stimulating the federal minimum wage in his economic proposal by increasing the minimum wage from $7.25 an hour (current) to at least $9 to lift numerous American families above the poverty line (Lowrey, 2013).

As demonstrated in the relevant economics literature, the recovery phase in the business cycle is typified by improvement in customer’s optimism of the market, low bank lending rates, growth of companies due to capacity to finance projects, enhanced productivity due to better aggregate demand of the economy, increased production that allows organizations to start recruiting new workers, and increased income of consumers who can now manage to buy capital goods (Ball, 2009; McConnell, 2009; Romer, 1999).

Although the other variables have not been addressed in the article, the proposed increase in the minimum wage by President Obama demonstrates an economy that is in its recovery phase after the financial crisis.

As illustrated in the article, there has been opposing views about President Obama’s proposal to raise minimum wages, with some conformists and economics experts saying that raising the costs of recruiting new workers results in few workers whereas other pundits suggest that minimum wage increment does not necessarily result in companies shedding workers because it helps minimize turnover (Lowrey, 2013).

These are valid arguments that business people need to be aware of as they make critical organizational decisions since they reflect the uncertainties of the recovery phase. However, according to available literature, the profit margins of American companies will begin to rise, and the GDP will also start to expand during the recovery phase (McConnell, 2009), hence the need to reciprocate by raising the minimum wages of workers in the lowest echelons of the economy.

Ultimately, therefore, President Obama’s proposal to raise the minimum wages as demonstrated in the article may be somewhat rushed because the American economy was in bad shape and the uncertainties of the future are still hanging on the minds of business practitioners as they re-engineer their companies to start making profits. However, it is the right thing to do because the United States economy is slowly recovering from the effects of the recent global recession.

Ball, L. M. (2009). Money, Banking, and Financial Markets. New York: Worth Publishers.

Lowrey, A. (2013). Living on minimum wage. New York Times .

McConnell, C. R. (2009). Economics: Principles, Problems, and Policies. Boston: McGraw-Hill Irwin.

Romer, C.D. (1999). Changes in business cycles: Evidence and explanations. Journal of Economic Perspectives, 13( 2), 23-44. Web.

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What is Business Cycles? Phases, Types, Theory, Nature

• Post last modified: 1 August 2021
• Reading time: 40 mins read
• Post category: Economics

What is the Business Cycle?

Business Cycle , also known as the  economic cycle  or  trade cycle , is the fluctuations in economic activities or rise and fall movement of gross domestic product (GDP) around its long-term growth trend.

No era can stay forever. The economy too does not enjoy same periods all the time. Due to its dynamic nature, it moves through various phases.

Table of Content

• 1 What is the Business Cycle?
• 2 Business Cycle Definition
• 3.1 Expansion
• 3.3 Contraction
• 4.1 Cyclical nature
• 4.2 General nature
• 5 Types of Business Cycle
• 6.1 Hawtrey Monetary Theory
• 6.2 Innovation Theory
• 6.3 Keynesian Theory
• 6.4 Hicks Theory
• 6.5 Samuelson theory
• 7 Business Economics Tutorial

The change in business activities due to fluctuations in economic activities over a period of time is known as a business cycle . Business cycle are also called trade cycle or economic cycle. Business Cycle  can also help you make better financial decisions. 

The economic activities of a country include total output, income level, prices of products and services, employment, and rate of consumption. All these activities are interrelated; if one activity changes, the rest of them also change.

Also Read: What is Economics?

Business Cycle Definition

Arthur F. Burns and Wesley C. Mitchel defined business cycle definition as

Business cycle are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions, and revivals which merge into the expansion phase of the next cycle; in duration, business cycle vary from more than one year to ten or twelve years; they are not divisible into shorter cycle of similar characteristics with amplitudes approximating their own. Arthur F. Burns & Wesley C. Mitchel

Also Read: What is Demand in Economics

Phases of Business Cycle

4 Phases of Business Cycle are:

Contraction

Let us discuss 4 phases of business cycle in detail:

Expansion is the first phase of a business cycle . It is often referred to as the growth phase .

In the expansion phase, there is an increase in various economic factors, such as production, employment, output, wages, profits, demand and supply of products, and sales. During this phase, the focus of organisations remains on increasing the demand for their products/services in the market.

The expansion phase is characterised by:

• Increase in demand
• Growth in income
• Rise in competition
• Rise in advertising
• Creation of new policies
• Development of brand loyalty

In this phase, debtors are generally in a good financial condition to repay their debts; therefore, creditors lend money at higher interest rates. This leads to an increase in the flow of money.

In the expansion phase, due to increase in investment opportunities, idle funds of organisations or individuals are utilised for various investment purposes. The expansion phase continues till economic conditions are favourable.

Peak is the next phase after expansion. In this phase, a business reaches at the highest level and the profits are stable. Moreover, organisations make plans for further expansion.

Peak phase is marked by the following features:

• High demand and supply
• High revenue and market share
• Reduced advertising
• Strong brand image

In the peak phase, the economic factors, such as production, profit, sales, and employment, are higher but do not increase further.

An organisation after being at the peak for a period of time begins to decline and enters the phase of contraction. This phase is also known as a recession .

An organisation can be in this phase due to various reasons, such as a change in government policies, rise in the level of competition, unfavourable economic conditions, and labour problems. Due to these problems, the organisation begins to experience a loss of market share.

The important features of the contraction phase are:

• Reduced demand
• Loss in sales and revenue
• Reduced market share
• Increased competition

In Trough phase, an organisation suffers heavy losses and falls at the lowest point. At this stage, both profits and demand reduce. The organisation also loses its competitive position.

The main features of this phase are:

• Lowest income
• Loss of customers
• Adoption of measures for cost-cutting and reduction
• Heavy fall in market share

In this phase, the growth rate of an economy becomes negative. In addition, in trough phase, there is a rapid decline in national income and expenditure.

After studying the business cycle , it is important to study the nature of business cycle .

Read: Difference Between Micro and Macro Economics

Nature of Business Cycle

The nature of business cycle helps the organisation to be prepared for facing uncertainties of the business environment.

Cyclical nature

General nature.

Let us discuss the nature of business cycle in detail.

This is the periodic nature of a business cycle. Periodicity signifies the occurrence of business cycle at regular intervals of time. However, periods of intervals are different for different business cycle . There is a general consensus that a normal business cycle can take 7 to 10 years to complete.

The general nature of a business cycle states that any change in an organisation affects all other organisations too in the industry. Thus, general nature regards the business world as a single economic unit.

For example, depression moves from one organisation to the other and spread throughout the industry. The general nature is also known as synchronism.

Read: What is Business Economics?

Types of Business Cycle

Following the writings of Prof .James Arthur and Schumpeter, we can classify business cycle into three types based on the underlying time period of existence of the cycle as follows:

• Short Kitchin Cycle
• Longer Juglar cycle
• Very long Kondratieff Wave

Short Kitchin Cycle (very short or minor period of the cycle, approximately 40 months duration)

Longer Juglar cycle (major cycles, composed of three minor cycles and of the duration of 10 years or so)

Very long Kondratieff Wave (very long waves of cycle, made up of six major cycles and takes more than 60 years to run its course of duration)

Also Read: Scope of Economics

Business Cycle Theory

A business cycle is a complex phenomenon which is common to every economic system. Several theories of business cycle have been propounded from time to time to explain the causes of business cycle.

Business Cycle Theory are:

Hawtrey Monetary Theory

Innovation theory.

• Keynesian theory

Hicks Theory

Samuelson theory.

Hawtray was of opinion that in depression monetary factors play a critical role. The main factor affecting the flow of money and money supply is the credit position by the bank. He made the classical quantity theory of money as the basis of his trade cycle theory .

According to him, both monetary and non-monetary factors also affect trade. His theory is basically the product of the supply of money and expansion of credit. This expansion of credit and other money supply instrument create a cumulative process of expansion which in return increase aggregate demand.

According to this theory the only cause of fluctuations in business is due to instability of bank credit. So it can be concluded that Hawtray’s theory of business cycle is basically depend upon the money supply, bank credits and rate of interests.

Criticism of this Business Cycle theory

• Hawtray neglected the role of non-monetary factors like prosperous agriculture, inventions, rate of profit and stock of capital.
• It only concentrates on the supply of money.
• Increase in interest rates is not only due to economic prosperity but also due to other factors.
• Over-emphasis on the role of wholesalers.
• Too much confidence in monetary policy. vi. Neglect the role of expectations. vii. Incomplete theory of trade cycles.

The innovation theory of business cycle is invented by an American Economist Joseph Schumpeter. According to this theory, the main causes of business cycle are over-innovations.

He takes the meaning of innovation as the introduction and application of such techniques which can help in increasing production by exploiting the existing resources, not by discoveries or inventions. Innovations are always inspired by profits. Whenever innovations are introduced it results into profitability then shared by other producers and result in a decline in profitability.

• Innovation fails to explain the period of boom and depression.
• Innovation may be major factor of investment and economic activities but not the complete process of trade cycle.
• This theory is based on the assumption that every new innovation is financed by the banks and other credit institutions but this cannot be taken as granted because banks finance only short term loans and investments.

Keynesian Theory

The theory suggests that fluctuations in business cycle can be explained by the perceptions on expected rate of profit of the investors. In other words, the downswing in business cycle is caused by the collapse in the marginal efficiency of capital, while revival of the economy is attributed to the optimistic perceptions on the expected rate of profit.

Moreover, Keynesian multiplier theory establishes linkages between change in investment and change in income and employment. However, the theory fails to explain the cumulative character both in the upswing and downswing phases of business cycle and cyclical fluctuations in economic activity with the passage of time.

Hicks extended the earlier multiplier-accelerator interaction theory by considering real world situation. In reality, income and output do not tend to explode; rather they are located at a range specified by the upper ceiling and lower floor determined by the autonomous investment.

In the theory, it is assumed that autonomous investment tends to grow at a constant percentage rate over the long run, the acceleration co-efficient and multiplier co-efficient remain constant throughout the different phases of the trade cycle, saving and investment co-efficient are such that upward movements take away from equilibrium.

The actual output fails to adjust with the equilibrium growth path overtime. In fact it has a tendency to run above it and then below it, and thereby, constitute cyclical fluctuations overtime. This basic intuition can be shown with the help of the following figure.

• Wrong assumption of constant multiplier and acceleration co-efficient.
• Highly mechanical and mathematical device.
• Wrong assumption of no-excess capacity.
• Full-employment ceiling is not independent

According to this theory process of multiplier starts working when autonomous investment takes place in the economy. With the autonomous investment income of the people rises and there is increase in the demand of consumer goods. It directly affected the marginal propensity to consume.

If there is no excess production capacity in the existing industry then existing stock of capital would not be adequate to produce consumer goods to meet the rising demand. Now in order to meet the consumer’s requirements, producers will make new investment which is derived investment and the process of acceleration principle comes into operation.

Then there is rise in income again which in the same manner continue the process of income propagation. So in this way multiplier and acceleration interact and make the income grow at faster rate than expected. After reaching its peak, income comes down to bottom and again start rising.

Autonomous investment is incurred by the government with the objective of social welfare. It is also called public investment. The autonomous investment is the investment which is done for the sake of new inventions in techniques of production.

Derived investment is the investment undertaken in capital equipment which is induced by increase in consumption.

• This model only concentrates on the impact of the multiplier and acceleration and it ignored the role of producer’s expectations, changing business requirements and consumers preferences etc.
• It is not practically possible to compute the fact of multiplier and acceleration principle.
• It has wrong assumption of constant capital output ratio.

Also Read: What is Law of Supply?

• D N Dwivedi, Managerial Economics , 8th ed, Vikas Publishing House
• Petersen, Lewis & Jain, Managerial Economics , 4e, Pearson Education India
• Brigham, & Pappas, (1972). Managerial economics , 13ed. Hinsdale, Ill.: Dryden Press.
• Dean, J. (1951). Managerial economics (1st ed.). New York: Prentice-Hall.

Business Economics Tutorial

( Click on Topic to Read )

• What is Economics?
• Scope of Economics
• Nature of Economics
• What is Business Economics?
• Micro vs Macro Economics
• Laws of Economics
• Economic Statics and Dynamics
• Gross National Product (GNP)
• What is Business Cycle?
• W hat is Inflation?
• What is Demand?
• Types of Demand
• Determinants of Demand 
• Law of Demand
• What is Demand Schedule?
• What is Demand Curve?
• What is Demand Function?
• Demand Curve Shifts
• What is Supply?
• Determinants of Supply
• Law of Supply
• What is Supply Schedule?
• What is Supply Curve?
• Supply Curve Shifts
• What is Market Equilibrium?

Consumer Demand Analysis

• Consumer Demand
• Utility in Economics
• Law of Diminishing Marginal Utility
• Cardinal and Ordinal Utility
• Indifference Curve
• Marginal Rate of Substitution
• Budget Line
• Consumer Equilibrium
• Revealed Preference Theory

Elasticity of Demand & Supply

• Elasticity of Demand
• Price Elasticity of Demand
• Types of Price Elasticity of Demand

Factors Affecting Price Elasticity of Demand

• Importance of Price Elasticity of Demand
• Income Elasticity of Demand
• Cross Elasticity of Demand
• Advertisement Elasticity of Demand
• Elasticity of Supply

Cost & Production Analysis

• Production in Economics
• Production Possibility Curve
• Production Function
• Types of Production Functions
• Production in the Short Run
• Law of Diminishing Returns
• Isoquant Curve
• Producer Equilibrium
• Returns to Scale

Cost and Revenue Analysis

• Types of Cost
• Short Run Cost
• Long Run Cost
• Economies and Diseconomies of Scale
• What is Revenue?

Market Structure

• Types of Market Structures
• Profit Maximization
• What is Market Power?
• Demand Forecasting
• Methods of Demand Forecasting
• Criteria for Good Demand Forecasting

Market Failure

• What Market Failure?

Price Ceiling and Price Floor

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Did we miss something in Business Economics Tutorial? Come on! Tell us what you think about our article on Business Cycle | Business Economics in the comments section.

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• Determinants of Demand

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Unit 2: Economic indicators and the business cycle

About this unit.

In this unit, you'll learn to identify and examine key measures of economic performance: gross domestic product, unemployment, and inflation. The concept of the business cycle also gives you an overview of economic fluctuations in the short run.

Gross Domestic Product

• Circular flow of income and expenditures (Opens a modal)
• Parsing gross domestic product (Opens a modal)
• More on final and intermediate GDP contributions (Opens a modal)
• Investment and consumption (Opens a modal)
• Income and expenditure views of GDP (Opens a modal)
• Value added approach to calculating GDP (Opens a modal)
• Components of GDP (Opens a modal)
• Expenditure approach to calculating GDP examples (Opens a modal)
• Examples of accounting for GDP (Opens a modal)
• Measuring the size of the economy: gross domestic product (Opens a modal)
• Lesson summary: The circular flow and GDP (Opens a modal)
• The circular flow model and GDP 4 questions Practice

Limitations of GDP

• Limitations of GDP (Opens a modal)
• Beyond GDP: other ways to measure the economy (Opens a modal)
• How well GDP measures the well-being of society (Opens a modal)
• Lesson summary: The limitations of GDP (Opens a modal)
• Limitations of GDP 4 questions Practice

Unemployment

• Unemployment rate primer (Opens a modal)
• Natural, cyclical, structural, and frictional unemployment rates (Opens a modal)
• Lesson summary: Unemployment (Opens a modal)
• Types of unemployment and the natural rate of unemployment 4 questions Practice
• Unemployment 4 questions Practice
• Introduction to inflation (Opens a modal)
• Actual CPI-U basket of goods (Opens a modal)
• Inflation data (Opens a modal)
• Deflation (Opens a modal)
• Example question calculating CPI and inflation (Opens a modal)
• Stagflation (Opens a modal)
• Deflationary spiral (Opens a modal)
• Tracking inflation (Opens a modal)
• How changes in the cost of living are measured (Opens a modal)
• How the United States and other countries experience inflation (Opens a modal)
• The confusion over inflation (Opens a modal)
• Lesson summary: Price indices and inflation (Opens a modal)
• The Consumer Price Index (CPI) 4 questions Practice

Costs of Inflation

• Winners and losers from inflation and deflation (Opens a modal)
• Lesson summary: The costs of inflation (Opens a modal)
• The costs of inflation 4 questions Practice

Real vs. nominal GDP

• Real GDP and nominal GDP (Opens a modal)
• GDP deflator (Opens a modal)
• Example calculating real GDP with a deflator (Opens a modal)
• Adjusting nominal values to real values (Opens a modal)
• Lesson summary: Real vs. nominal GDP (Opens a modal)
• Real vs. nominal GDP 4 questions Practice

Business cycles

• The business cycle (Opens a modal)
• Tracking real GDP over time (Opens a modal)
• Lesson summary: Business cycles (Opens a modal)
• Business cycles 4 questions Practice

Business Cycle: Definition, Characteristics and Phases (With Diagram)

1. Definition of Business Cycle:

A capitalistic economy experiences fluctua­tions in the level of economic activity. And fluctuations in economic activity mean fluctuations in macroeconomic variables.

At times, consumption, investment, employment, output, etc., rise and at other times these macroeconomic variables fall.

Such fluctua­tions in macroeconomic variables are known as business cycles. A capitalistic economy exhibits alternating periods of prosperity or boom and depression. Such movements are similar to wave-like movements or see saw movements. Thus, the cyclical fluctuations are rather regular and steady but not random.

Since GNP is the comprehensive measure of the overall economic activity, we refer to business cycles as the short term cyclical movements in GNP. In the words of Keynes : “A trade cycle is composed of periods of good trade characterised by rising prices and low unemployment percentages, alternating with periods of bad trade characterised by falling prices and high unemployment percentages.”

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In brief, a business cycle is the periodic but irregular up-and-down movements in economic activity. Since their timing changes rather unpredictably, business cycles are not regular or repeating cycles like the phases of the moon.

2. Characteristics of Business Cycles:

Following are the main features of trade cycles:

(i) Industrialised capitalistic economies witness cyclical movements in economic activities. A socialist economy is free from such disturbances.

(ii) It exhibits a wave-like movement having a regularity and recognised patterns. That is to say, it is repetitive in character.

(iii) Almost all sectors of the economy are affected by the cyclical movements. Most of the sectors move together in the same direction. During prosperity, most of the sectors or industries experience an increase in output and during recession they experience a fall in output.

(iv) Not all the industries are affected uniformly. Some are hit badly during depression while others are not affected seriously.

Investment goods industries fluctuate more than the consumer goods industries. Further, industries producing consumer durable goods generally experience greater fluctuations than sectors producing non­durable goods. Further, fluctuations in the service sector are insignificant in comparison with both capital goods and consumer goods industries.

(v) One also observes the tendency for consumer goods output to lead investment goods output in the cycle. During recovery, increase in output of consumer goods usually precedes that of investment goods. Thus, the recovery of consumer goods industries from recessionary tendencies is quicker than that of investment goods industries.

(vi) Just as outputs move together in the same direction, so do the prices of various goods and services, though prices lag behind output. Fluctuations in the prices of agricultural products are more marked than those of prices of manufactured articles.

(vii) Profits tend to be highly variable and pro-cyclical. Usually, profits decline in recession and rise in boom. On the other hand, wages are more or less sticky though they tend to rise during boom.

(viii) Trade cycles are ‘international’ in character in the sense that fluctuations in one country get transmitted to other countries. This is because, in this age of globalisation, dependence of one country on other countries is great.

(ix) Periodicity of a trade cycle is not uniform, though fluctuations are something in the range of five to ten years from peak to peak. Every cycle exhibits similarities in its nature and direction though no two cycles are exactly the same. In the words of Samuelson: “No two business cycles are quite the same. Yet they have much in common. Though not identical twins, they are recognisable as belonging to the same family.”

(x) Every cycle has four distinct phases: (a) depression, (b) revival, (c) prosperity or boom, and (d) recession.

3. Phases of a Business Cycle:

A typical business cycle has two phases ex­pansion phase or upswing or peak and con­traction phase or downswing or trough. The upswing or expansion phase exhibits a more rapid growth of GNP than the long run trend growth rate. At some point, GNP reaches its upper turning point and the downswing of the cycle begins. In the contraction phase, GNP declines.

At some time, GNP reaches its lower turning point and expansion begins. Starting from a lower turning point, a cycle experiences the phase of recovery and after some time it reaches the upper turning point the peak. But, continuous prosperity can never occur and the process of downhill starts. In this con­traction phase, a cycle exhibits first a reces­sion and then finally reaches the bottom—the depression.

Thus, a trade cycle has four phases:

(i) depression,

(ii) revival,

(iii) boom, and

(iv) recession.

These phases of a trade cy­cle are illustrated in Fig. 2.7. In this figure, the secular growth path or trend growth rate of GNP has been labelled as EG. Now we briefly describe the essential characteristics of these phases of an idealised cycle.

1. Depression or Trough:

The depression or trough is the bottom of a cycle where eco­nomic activity remains at a highly low level. Income, employment, output, price level, etc. go down. A depression is generally character­ised by high unemployment of labour and capital and a low level of consumer demand in relation to the economy’s capacity to pro­duce. This deficiency in demand forces firms to cut back production and lay-off workers.

Thus, there develops a substantial amount of unused productive capacity in the economy. Even by lowering down the interest rates, fi­nancial institutions do not find enough bor­rowers. Profits may even become negative. Firms become hesitant in making fresh invest­ments. Thus, an air of pessimism engulfs the entire economy and the economy lands into the phase of depression. However, the seeds of recovery of the economy lie dormant in this phase.

2. Recovery:

Since trough is not a permanent phenomenon, a capitalistic economy experiences expansion and, therefore, the process of recovery starts.

During depression some machines wear out completely and ultimately become useless. For their survival, businessmen replace old and worn-out machinery. Thus, spending spree starts, of course, hesitantly. This gives an optimistic signal to the economy. Industries begin to rise and expectations tend to become more favourable. Pessimism that once prevailed in the economy now makes room for optimism. Investment becomes no longer risky. Additional and fresh investment leads to a rise in production.

Increased production leads to an increase in demand for inputs. Employment of more labour and capital causes GNP to rise. Further, low interest rates charged by banks in the early years of recovery phase act as an incentive to producers to borrow money. Thus, investment rises. Now plants get utilised in a better way. General price level starts rising. The recovery phase, however, gets gradually cumulative and income, employment, profit, price, etc., start increasing.

3. Prosperity:

Once the forces of revival get strengthened the level of economic activity tends to reach the highest point—the peak. A peak is the top .of a cycle. The peak is characterised by an allround optimism in the economy—income, employment, output, and price level tend to rise. Meanwhile, a rise in aggregate demand and cost leads to a rise in both investment and price level. But once the economy reaches the level of full employment, additional investment will not cause GNP to rise.

On the other hand, demand, price level, and cost of production will rise. During prosperity, existing capacity of plants is overutilised. Labour and raw material shortages develop. Scarcity of resources leads to rising cost. Aggregate demand now outstrips aggregate supply. Businessmen now come to learn that they have overstepped the limit. High optimism now gives birth to pessimism. This ultimately slows down the economic expansion and paves the way for contraction.

4. Recession:

Like depression, prosperity or pea, can never be long-lasting. Actually speaking, the bubble of prosperity gradually dies down. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough or depression. Between trough and peak, the economy grows or expands. A recession is a significant decline in economic activity spread across the economy lasting more then a few months, normally visible in production, employment, real income and other indications.

During this phase, the demand of firms and households for goods and services start to fall. No new industries are set up. Sometimes, existing industries are wound up. Unsold goods pile up because of low household demand. Profits of business firms dwindle. Output and employment levels are reduced. Eventually, this contracting economy hits the slump again. A recession that is deep and long-lasting is called a depression and, thus, the whole process restarts.

The four-phased trade cycle has the following attributes:

(i) Depression lasts longer than prosperity,

(ii) The process of revival starts gradually,

(iii) Prosperity phase is characterised by extreme activity in the business world,

(iv) The phase of prosperity comes to an end abruptly.

The period of a cycle, i.e., the length of time required for the completion of one complete cycle, is measured from peak to peak (P to P’) and from trough to trough (from D to D’). The shortest of the cycle is called ‘seasonal cycle’.

Related Articles:

• 5 Phases of a Business Cycle (With Diagram)
• Business Cycles: Definition and Concept
• Business or Trade Cycles in an Economy: Meaning, Definition and Types
• Real GNP and Business Cycle (With Diagram)

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• How to Measure Cycles

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Economic theory, the bottom line, economic cycle: definition and 4 stages of the business cycle.

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• How The Federal Reserve Fights Recession
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• Are Recessions Inevitable?
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• Impact of Recessions on Businesses
• Businesses That Thrive in Recession
• Industries That Thrive on Recession
• The Best Investing Strategy for Recessions
• Characteristics of Recession-Proof Companies
• Take Advantage of a Recession
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• Review of Past Recessions
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• Fiscal Policy
• Growth Recession
• Inverted Yield Curve
• Recession Proof
• Recession Resistant
• K-Shaped Recovery
• L-Shaped Recovery
• U-Shaped Recovery
• V-Shaped Recovery
• W-Shaped Recovery

An economic cycle, also known as a  business cycle , refers to economic fluctuations between periods of expansion and contraction. Factors such as  gross domestic product (GDP) ,  interest rates , total employment, and consumer spending can help determine the current economic cycle stage.

Understanding the economic period can help investors and businesses determine when to make investments and when to pull their money out, as each cycle impacts stocks and bonds as well as profits and corporate earnings.

Key Takeaways

• An economic cycle is the overall state of the economy as it goes through four stages in a cyclical pattern: expansion, peak, contraction, and trough.
• Factors such as GDP, interest rates, total employment, and consumer spending can help determine the current stage of the economic cycle.
• The causes of a cycle are highly debated among different schools of economics.

Investopedia / Mira Norian

Stages of the Economic Cycle

An economic cycle is the circular movement of an economy as it moves from expansion to  contraction  and back again. Economic expansion is characterized by growth and contraction, including recession, a decline in economic activity that can last several months. Four stages characterize the economic cycle or business cycle.

During expansion, the economy experiences relatively rapid growth,  interest rates tend to be low, and production increases. The economic indicators associated with growth, such as employment and wages, corporate profits and output, aggregate demand, and the supply of goods and services, tend to show sustained uptrends through the expansionary stage. The flow of money through the economy remains healthy and the cost of money is cheap. However, the increase in the money supply may spur inflation during the economic growth phase.

The peak of a cycle is when growth hits its maximum rate. Prices and economic indicators may stabilize for a short period before reversing to the downside. Peak growth typically creates some imbalances in the economy that need to be corrected. As a result, businesses may start to reevaluate their budgets and spending when they believe that the economic cycle has reached its peak.

Contraction

A  correction  occurs when growth slows, employment falls, and prices stagnate. As demand decreases, businesses may not immediately adjust production levels, leading to oversaturated markets with surplus supply and a downward movement in prices. If the contraction continues, the recessionary environment may spiral into a depression .

The trough of the cycle is reached when the economy hits a low point, with supply and demand hitting bottom before recovery. The low point in the cycle represents a painful moment for the economy, with a widespread negative impact from stagnating spending and income. The low point provides an opportunity for individuals and businesses to reconfigure their finances in anticipation of a recovery.

Measuring Economic Cycles

Key  metrics  determine where the economy is and where it's headed. The  National Bureau of Economic Research (NBER)  is the definitive source for marking the official dates for U.S. economic cycles. Relying primarily on changes in GDP, NBER measures the length of economic cycles from trough to trough or peak to peak.

Since the 1950s, a U.S. economic cycle, on average, lasted about five and a half years. However, there is wide variation in the length of cycles, ranging from just 18 months during the peak-to-peak cycle in 1981 to 1982 up to the expansion that began in 2009. According to the NBER, two peaks occurred between 2019 and 2020. The first was in the fourth quarter of 2019, a peak in quarterly economic activity. The monthly peak happened in a different quarter, which was noted as taking place in February 2020.

This wide variation in cycle length dispels the myth that economic cycles are a regular natural activity akin to physical waves or swings of a pendulum. But there is debate as to what factors contribute to the length of an economic cycle and what causes them to exist in the first place.

Businesses and investors need to manage their strategy over economic cycles—not so much to control them but to survive them and perhaps profit from them.

Governments, financial institutions, and investors manage the course and effects of economic cycles differently. During a recession, a government may use expansionary  fiscal policy and rapid  deficit spending . It can also try contractionary fiscal policy by taxing and running a  budget surplus  to reduce aggregate spending to prevent the economy from overheating during expansion.

Central banks may use  monetary policy . When the cycle hits a downturn, a central bank can lower interest rates or implement expansionary monetary policy to boost spending and investment. During expansion, it can employ contractionary monetary policy by raising interest rates and slowing the flow of credit into the economy.

During expansion, investors often find opportunities in the technology, capital goods, and energy sectors. When the economy contracts, investors may purchase companies that  thrive during recessions , such as utilities, consumer staples, and healthcare.

Businesses that track the relationship between their performance and business cycles can plan strategically to protect themselves from approaching downturns and position themselves to take maximum advantage of economic expansions. For example, if your business follows the rest of the economy, warning signs of an impending recession may suggest you shouldn't expand. You may be better off building up your  cash reserves .

Monetarism  suggests that government can achieve economic stability through their  money supply's  growth rate. It ties the economic cycle to the  credit cycle , where changes in interest rates reduce or induce economic activity by making borrowing by households, businesses, and the government more or less expensive.

The  Keynesian  approach argues that changes in aggregate demand, spurred by inherent instability and  volatility  in investment demand, are responsible for generating cycles. When business sentiment turns gloomy and investment slows, a self-fulfilling loop of economic malaise can result. Less spending means less demand, which induces businesses to lay off workers. According to Keynesians, unemployment means less consumer spending , and the whole economy sours, with no clear solution other than government intervention and  economic stimulus .

What Are the Stages of an Economic Cycle?

An economic cycle, or business cycle, has four stages: expansion, peak, contraction, and trough. The average economic cycle in the U.S. has lasted roughly five and a half years since 1950, although these cycles can vary in length. Factors to indicate the stages include gross domestic product, consumer spending, interest rates, and inflation. The National Bureau of Economic Research (NBER) is a leading source for indicating the length of a cycle.

What Happens in Each Phase of the Economic Cycle?

In the expansionary phase, the economy experiences growth over two or more consecutive quarters. Interest rates are typically lower, employment rates rise, and consumer confidence strengthens. The peak phase occurs when the economy reaches its maximum productive output, signaling the end of the expansion. After that point, employment numbers and housing starts to decline, leading to a contractionary phase. The lowest point in the business cycle is a trough, which is characterized by higher unemployment, lower availability of credit, and falling prices.

What Causes an Economic Cycle?

The causes of an economic cycle are widely debated among different economic schools of thought. Monetarists, for example, link the economic cycle to the credit cycle. Here, interest rates, which intimately affect the price of debt, influence consumer spending and economic activity. On the other hand, a Keynesian approach suggests that the economic cycle is caused by volatility or investment demand, which in turn affects spending and employment.

The economic or business cycle refers to the cyclical pattern experienced by the economy. The economy remains in an expansion phase until it reaches its peak, reversing to the downside and entering a contraction before a trough, and begins to expand once again. GDP, interest rates, employment levels, and consumer spending can help define the economic cycle. Although there are different economic theories to explain what drives the economic cycle , the conditions associated with each stage can impact business and investment decisions.

Congressional Research Service. " Introduction to U.S. Economy: The Business Cycle and Growth ," Page 1.

National Bureau of Economic Research. " Business Cycle Dating ."

National Bureau of Economic Research. " US Business Cycle Expansions and Contractions ."

National Bureau of Economic Research. " NBER Determination of the February 2020 Peak in Economic Activity ."

International Monetary Fund. " Fiscal Policy: Taking and Giving Away ."

International Monetary Fund. " Monetary Policy: Stabilizing Prices and Output ."

International Monetary Fund. " What Is Keynesian Economics? "

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1 Introduction

• Published: August 2002
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This chapter begins by discussing that business cycles came to be regarded as such in the nineteenth century. It then enumerates five schools of thought which provide alternative explanations for business cycles: Keynesian economics, monetarism, new classical economics, the RBC theory, and new Keynesian economics. Subsequently, it explains that business cycles can be viewed as disturbed sine wave-like movements in aggregate production. Otherwise, business cycles can be characterized with the statistical properties of observed time series for aggregate output: aggregate production displays variability, persistence, and reversion. Moreover, as suggested by Frisch, business cycles can be modeled by means of stochastic second-order difference equations. The solution to a stochastic second-order difference equation can be viewed as a disturbed sine wave. For appropriate parameter values, it features variability, persistence, and reversion. Lastly, it discusses that the co-movements of many macroeconomic variables show a high degree of conformity with GNP.

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How to Write an Essay Introduction (with Examples)   

The introduction of an essay plays a critical role in engaging the reader and providing contextual information about the topic. It sets the stage for the rest of the essay, establishes the tone and style, and motivates the reader to continue reading. 

Table of Contents

What is an essay introduction , what to include in an essay introduction, how to create an essay structure , step-by-step process for writing an essay introduction , how to write an introduction paragraph , how to write a hook for your essay , how to include background information , how to write a thesis statement .

• Argumentative Essay Introduction Example: 
• Expository Essay Introduction Example 

Literary Analysis Essay Introduction Example

Check and revise – checklist for essay introduction , key takeaways , frequently asked questions .

An introduction is the opening section of an essay, paper, or other written work. It introduces the topic and provides background information, context, and an overview of what the reader can expect from the rest of the work. 1 The key is to be concise and to the point, providing enough information to engage the reader without delving into excessive detail. 

The essay introduction is crucial as it sets the tone for the entire piece and provides the reader with a roadmap of what to expect. Here are key elements to include in your essay introduction: 

• Hook : Start with an attention-grabbing statement or question to engage the reader. This could be a surprising fact, a relevant quote, or a compelling anecdote. 
• Background information : Provide context and background information to help the reader understand the topic. This can include historical information, definitions of key terms, or an overview of the current state of affairs related to your topic. 
• Thesis statement : Clearly state your main argument or position on the topic. Your thesis should be concise and specific, providing a clear direction for your essay. 

Before we get into how to write an essay introduction, we need to know how it is structured. The structure of an essay is crucial for organizing your thoughts and presenting them clearly and logically. It is divided as follows: 2  

• Introduction:  The introduction should grab the reader’s attention with a hook, provide context, and include a thesis statement that presents the main argument or purpose of the essay.  
• Body:  The body should consist of focused paragraphs that support your thesis statement using evidence and analysis. Each paragraph should concentrate on a single central idea or argument and provide evidence, examples, or analysis to back it up.  
• Conclusion:  The conclusion should summarize the main points and restate the thesis differently. End with a final statement that leaves a lasting impression on the reader. Avoid new information or arguments. 

Here’s a step-by-step guide on how to write an essay introduction: 

• Start with a Hook : Begin your introduction paragraph with an attention-grabbing statement, question, quote, or anecdote related to your topic. The hook should pique the reader’s interest and encourage them to continue reading. 
• Provide Background Information : This helps the reader understand the relevance and importance of the topic. 
• State Your Thesis Statement : The last sentence is the main argument or point of your essay. It should be clear, concise, and directly address the topic of your essay. 
• Preview the Main Points : This gives the reader an idea of what to expect and how you will support your thesis. 
• Keep it Concise and Clear : Avoid going into too much detail or including information not directly relevant to your topic. 
• Revise : Revise your introduction after you’ve written the rest of your essay to ensure it aligns with your final argument. 

Here’s an example of an essay introduction paragraph about the importance of education: 

Education is often viewed as a fundamental human right and a key social and economic development driver. As Nelson Mandela once famously said, “Education is the most powerful weapon which you can use to change the world.” It is the key to unlocking a wide range of opportunities and benefits for individuals, societies, and nations. In today’s constantly evolving world, education has become even more critical. It has expanded beyond traditional classroom learning to include digital and remote learning, making education more accessible and convenient. This essay will delve into the importance of education in empowering individuals to achieve their dreams, improving societies by promoting social justice and equality, and driving economic growth by developing a skilled workforce and promoting innovation. 

This introduction paragraph example includes a hook (the quote by Nelson Mandela), provides some background information on education, and states the thesis statement (the importance of education). 

This is one of the key steps in how to write an essay introduction. Crafting a compelling hook is vital because it sets the tone for your entire essay and determines whether your readers will stay interested. A good hook draws the reader in and sets the stage for the rest of your essay.  

• Avoid Dry Fact : Instead of simply stating a bland fact, try to make it engaging and relevant to your topic. For example, if you’re writing about the benefits of exercise, you could start with a startling statistic like, “Did you know that regular exercise can increase your lifespan by up to seven years?” 
• Avoid Using a Dictionary Definition : While definitions can be informative, they’re not always the most captivating way to start an essay. Instead, try to use a quote, anecdote, or provocative question to pique the reader’s interest. For instance, if you’re writing about freedom, you could begin with a quote from a famous freedom fighter or philosopher. 
• Do Not Just State a Fact That the Reader Already Knows : This ties back to the first point—your hook should surprise or intrigue the reader. For Here’s an introduction paragraph example, if you’re writing about climate change, you could start with a thought-provoking statement like, “Despite overwhelming evidence, many people still refuse to believe in the reality of climate change.” 

Including background information in the introduction section of your essay is important to provide context and establish the relevance of your topic. When writing the background information, you can follow these steps: 

• Start with a General Statement:  Begin with a general statement about the topic and gradually narrow it down to your specific focus. For example, when discussing the impact of social media, you can begin by making a broad statement about social media and its widespread use in today’s society, as follows: “Social media has become an integral part of modern life, with billions of users worldwide.” 
• Define Key Terms : Define any key terms or concepts that may be unfamiliar to your readers but are essential for understanding your argument. 
• Provide Relevant Statistics:  Use statistics or facts to highlight the significance of the issue you’re discussing. For instance, “According to a report by Statista, the number of social media users is expected to reach 4.41 billion by 2025.” 
• Discuss the Evolution:  Mention previous research or studies that have been conducted on the topic, especially those that are relevant to your argument. Mention key milestones or developments that have shaped its current impact. You can also outline some of the major effects of social media. For example, you can briefly describe how social media has evolved, including positives such as increased connectivity and issues like cyberbullying and privacy concerns. 
• Transition to Your Thesis:  Use the background information to lead into your thesis statement, which should clearly state the main argument or purpose of your essay. For example, “Given its pervasive influence, it is crucial to examine the impact of social media on mental health.” 

A thesis statement is a concise summary of the main point or claim of an essay, research paper, or other type of academic writing. It appears near the end of the introduction. Here’s how to write a thesis statement: 

• Identify the topic:  Start by identifying the topic of your essay. For example, if your essay is about the importance of exercise for overall health, your topic is “exercise.” 
• State your position:  Next, state your position or claim about the topic. This is the main argument or point you want to make. For example, if you believe that regular exercise is crucial for maintaining good health, your position could be: “Regular exercise is essential for maintaining good health.” 
• Support your position:  Provide a brief overview of the reasons or evidence that support your position. These will be the main points of your essay. For example, if you’re writing an essay about the importance of exercise, you could mention the physical health benefits, mental health benefits, and the role of exercise in disease prevention. 
• Make it specific:  Ensure your thesis statement clearly states what you will discuss in your essay. For example, instead of saying, “Exercise is good for you,” you could say, “Regular exercise, including cardiovascular and strength training, can improve overall health and reduce the risk of chronic diseases.” 

Examples of essay introduction 

Here are examples of essay introductions for different types of essays: 

Argumentative Essay Introduction Example:  

Topic: Should the voting age be lowered to 16? 

“The question of whether the voting age should be lowered to 16 has sparked nationwide debate. While some argue that 16-year-olds lack the requisite maturity and knowledge to make informed decisions, others argue that doing so would imbue young people with agency and give them a voice in shaping their future.” 

Expository Essay Introduction Example  

Topic: The benefits of regular exercise 

“In today’s fast-paced world, the importance of regular exercise cannot be overstated. From improving physical health to boosting mental well-being, the benefits of exercise are numerous and far-reaching. This essay will examine the various advantages of regular exercise and provide tips on incorporating it into your daily routine.” 

Text: “To Kill a Mockingbird” by Harper Lee 

“Harper Lee’s novel, ‘To Kill a Mockingbird,’ is a timeless classic that explores themes of racism, injustice, and morality in the American South. Through the eyes of young Scout Finch, the reader is taken on a journey that challenges societal norms and forces characters to confront their prejudices. This essay will analyze the novel’s use of symbolism, character development, and narrative structure to uncover its deeper meaning and relevance to contemporary society.” 

• Engaging and Relevant First Sentence : The opening sentence captures the reader’s attention and relates directly to the topic. 
• Background Information : Enough background information is introduced to provide context for the thesis statement. 
• Definition of Important Terms : Key terms or concepts that might be unfamiliar to the audience or are central to the argument are defined. 
• Clear Thesis Statement : The thesis statement presents the main point or argument of the essay. 
• Relevance to Main Body : Everything in the introduction directly relates to and sets up the discussion in the main body of the essay. 

Writing a strong introduction is crucial for setting the tone and context of your essay. Here are the key takeaways for how to write essay introduction: 3  

• Hook the Reader : Start with an engaging hook to grab the reader’s attention. This could be a compelling question, a surprising fact, a relevant quote, or an anecdote. 
• Provide Background : Give a brief overview of the topic, setting the context and stage for the discussion. 
• Thesis Statement : State your thesis, which is the main argument or point of your essay. It should be concise, clear, and specific. 
• Preview the Structure : Outline the main points or arguments to help the reader understand the organization of your essay. 
• Keep it Concise : Avoid including unnecessary details or information not directly related to your thesis. 
• Revise and Edit : Revise your introduction to ensure clarity, coherence, and relevance. Check for grammar and spelling errors. 
• Seek Feedback : Get feedback from peers or instructors to improve your introduction further. 

The purpose of an essay introduction is to give an overview of the topic, context, and main ideas of the essay. It is meant to engage the reader, establish the tone for the rest of the essay, and introduce the thesis statement or central argument.  

An essay introduction typically ranges from 5-10% of the total word count. For example, in a 1,000-word essay, the introduction would be roughly 50-100 words. However, the length can vary depending on the complexity of the topic and the overall length of the essay.

An essay introduction is critical in engaging the reader and providing contextual information about the topic. To ensure its effectiveness, consider incorporating these key elements: a compelling hook, background information, a clear thesis statement, an outline of the essay’s scope, a smooth transition to the body, and optional signposting sentences.  

The process of writing an essay introduction is not necessarily straightforward, but there are several strategies that can be employed to achieve this end. When experiencing difficulty initiating the process, consider the following techniques: begin with an anecdote, a quotation, an image, a question, or a startling fact to pique the reader’s interest. It may also be helpful to consider the five W’s of journalism: who, what, when, where, why, and how.   For instance, an anecdotal opening could be structured as follows: “As I ascended the stage, momentarily blinded by the intense lights, I could sense the weight of a hundred eyes upon me, anticipating my next move. The topic of discussion was climate change, a subject I was passionate about, and it was my first public speaking event. Little did I know , that pivotal moment would not only alter my perspective but also chart my life’s course.” 

Crafting a compelling thesis statement for your introduction paragraph is crucial to grab your reader’s attention. To achieve this, avoid using overused phrases such as “In this paper, I will write about” or “I will focus on” as they lack originality. Instead, strive to engage your reader by substantiating your stance or proposition with a “so what” clause. While writing your thesis statement, aim to be precise, succinct, and clear in conveying your main argument.  

To create an effective essay introduction, ensure it is clear, engaging, relevant, and contains a concise thesis statement. It should transition smoothly into the essay and be long enough to cover necessary points but not become overwhelming. Seek feedback from peers or instructors to assess its effectiveness. 

References  

• Cui, L. (2022). Unit 6 Essay Introduction.  Building Academic Writing Skills . 
• West, H., Malcolm, G., Keywood, S., & Hill, J. (2019). Writing a successful essay.  Journal of Geography in Higher Education ,  43 (4), 609-617. 
• Beavers, M. E., Thoune, D. L., & McBeth, M. (2023). Bibliographic Essay: Reading, Researching, Teaching, and Writing with Hooks: A Queer Literacy Sponsorship. College English, 85(3), 230-242. 

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Apple's Adoption Of AI For iPhones Will Drive 'Multi-Year Upgrade Cycle,' Say Analysts Ahead Of WWDC: BofA Sets $230 Target For Its 'Top Pick'

Analysts are predicting a significant shift in the smartphone industry with the introduction of AI-powered "IntelliPhones," and are reiterating Apple Inc. (NASDAQ:AAPL) as a "top pick."

What Happened : Analysts at Bank of America are expecting the advent of AI smartphones, or "IntelliPhones," to trigger a major upgrade cycle, akin to the introduction of smartphones.

These devices are predicted to dominate edge AI, outperforming AI PCs due to their portability, features, and cost.

"We expect the adoption curve of AI phones to be faster than the adoption of smartphones. With an installed base of over 4 billion smartphones, we see the opportunity for the next upgrade cycle to be once in a decade type of event," the analysts at Bank of America Securities said in a note seen by Benzinga.

See Also: Apple’s WWDC Keynote Schedule Is Out As Tim Cook-Led Company Looks To Unveil Its AI Strategy: Here’s What You Need To Know

While Apple is not expected to reveal all the AI features at the upcoming WWDC, a pathway for "IntelliPhones" to become mainstream is expected, especially as conversational AI becomes more integrated into everyday use.

The brokerage reiterated Apple as a "top pick" with a target price of $230, pointing to an upside of over 20% from the current share price of $191.58.

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While smartphones offered clear advantages over keypad-based phones, especially when Apple unveiled the iPhone in 2007, the transition from smartphones to AI-powered "IntelliPhones" will be driven by features like " superior personal assistance, language processing, health monitoring," among other features.

See Also: Elon Musk Shares Hack To Improve Google Search Quality: ‘It’s A Real Problem!’

Why It Matters: More than half of the world’s smartphones are expected to be AI-capable by 2028, according to market analytics firm Canalys. This comes as Apple’s iPhone 16 launch nears, and the company is set to unveil its AI strategy at the upcoming WWDC.

Wedbush analyst Dan Ives thinks Apple's "iPhone AI moment" is here, driving a "supercycle" for Cupertino's upcoming September launch.

Price Action: At the time of writing, Apple's shares were up 0.84%, trading at $191.58, according to Benzinga Pro.

Check out more of Benzinga's Consumer Tech coverage by following this link.

Read Next: When Apple Plunged Into Severe Losses, Steve Jobs Used These 3 Simple Strategies To Save Cupertino From Bankruptcy

Disclaimer:  This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.

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