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    The business cycle has four phases: 1. Prosperity, when economic activity peaks with maximum output and rising incomes and profits. 2. Recession begins as demand falls, leading to declining output, incomes, employment and profits. 3. Depression is characterized by low economic activity and a trough in output. 4. Recovery starts as demand and investment rise again, reversing the downturn into renewed prosperity and starting the cycle again.

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    The business cycle has four phases: 1. Prosperity, when economic activity peaks with maximum output and rising incomes and profits. 2. Recession begins as demand falls, leading to declining output, incomes, employment and profits. 3. Depression is characterized by low economic activity and a trough in output. 4. Recovery starts as demand and investment rise again, reversing the downturn into renewed prosperity and starting the cycle again.

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    43 views2 pages

    Business Cycles/Trade Cycles

    Uploaded by

    monu
    The business cycle has four phases: 1. Prosperity, when economic activity peaks with maximum output and rising incomes and profits. 2. Recession begins as demand falls, leading to declining output, incomes, employment and profits. 3. Depression is characterized by low economic activity and a trough in output. 4. Recovery starts as demand and investment rise again, reversing the downturn into renewed prosperity and starting the cycle again.

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    BUSINESS CYCLES/TRADE CYCLES

    The business cycle is the periodic but irregular up-and-down movements in economic
    activity, measured by fluctuations in real GDP and other macroeconomic variables.
    Four Phases of Business Cycle
    Business Cycle (or Trade Cycle) is divided into the following four phases :1.

    Prosperity: Expansion or Boom or Upswing of economy.

    2.

    Recession: from prosperity to recession (upper turning point).

    3.

    Depression: Contraction or Downswing of economy.

    4.

    Recovery: from depression to prosperity (lower turning Point).


    Phases of Business Cycle
    The four phases of business cycles are shown in the following diagram :-

    The business cycle starts from a trough (lower point) and passes through a recovery
    phase followed by a period of expansion (upper turning point) and prosperity. After the
    peak point is reached there is a declining phase of recession followed by a depression.
    Again the business cycle continues similarly with ups and downs.
    1. Prosperity
    When there is an expansion of output, income, employment, prices and profits, there is
    also a rise in the standard of living. This period is termed as Prosperity phase. Due to

    full employment of resources, the level of production is Maximum and there is a rise in
    GNP (Gross National Product). Due to a high level of economic activity, it causes a rise
    in prices and profits. There is an upswing in the economic activity and economy reaches
    its Peak. This is also called as a Boom Period.
    2. Recession
    The turning point from prosperity to depression is termed as Recession Phase.
    During a recession period, the economic activities slow down. When demand starts
    falling, the overproduction and future investment plans are also given up. There is a
    steady decline in the output, income, employment, prices and profits. The businessmen
    lose confidence and become pessimistic (Negative). It reduces investment. The banks
    and the people try to get greater liquidity, so credit also contracts. Expansion of
    business stops, stock market falls. Orders are cancelled and people start losing their
    jobs. The increase in unemployment causes a sharp decline in income and aggregate
    demand. Generally, recession lasts for a short period.
    3. Depression
    When there is a continuous decrease of output, income, employment, prices and profits,
    there is a fall in the standard of living and depression sets in
    In depression, there is under-utilization of resources and fall in GNP (Gross National
    Product). The aggregate economic activity is at the lowest, causing a decline in prices
    and profits until the economy reaches its Trough (low point).
    4. Recovery Phase
    The turning point from depression to expansion is termed as Recovery or Revival Phase.
    During the period of revival or recovery, there are expansions and rise in economic
    activities. When demand starts rising, production increases and this causes an increase
    in investment. There is a steady rise in output, income, employment, prices and profits.
    The businessmen gain confidence and become optimistic (Positive). This increases
    investments. The stimulation of investment brings about the revival or recovery of the
    economy. The banks expand credit, business expansion takes place and stock markets
    are activated. There is an increase in employment, production, income and aggregate
    demand, prices and profits start rising, and business expands. Revival slowly emerges
    into prosperity, and the business cycle is repeated.

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