Economy Fluctuations: Decoding the Highs and Lows [Stages and Features]

Economy Fluctuations: Decoding the Highs and Lows [Stages and Features]

The business cycle is a periodic and irregular rise and fall of an economy's output, traced by real GDP and industrial production growth. This cycle consists of expansion, peak, contraction, and trough phases.

The expansion phase, the initial expansion after exiting the trough, is characterised by increased economic activity, high economic growth, and upward pressure on the inflation rate. On the other hand, the contraction phase, which occurs after the peak but before the trough, is marked by a falling economy, deteriorating income and employment prospects, reduced spending, and piling inventories.

The trough phase, when the economy's output falls and is at its lowest point, signals the end of the contraction phase and the beginning of the recovery. The expansion phase follows, leading eventually to the peak phase, where the economy is testing its upper limit, with slowing economic growth, a tight labor market, rising wages, and high inflation pressure.

Classical economists argue that the economy is self-regulating and returns to recovery without government intervention. However, policymakers often use expansionary policies to prevent a recession from worsening. Keynesian economists advise the government to intervene through loose economic policies during the trough phase, such as increasing spending or cutting taxes.

One of the most significant causes of the economic depression in the USA between 1929 and 1939 was the stock market crash on Black Thursday in 1929, which triggered massive investor losses and bankruptcies, widespread unemployment, and a severe loss of confidence. Additionally, the Federal Reserve’s contraction of the money supply by over 30% worsened the crisis, acting as a catalyst for the Great Depression.

Understanding the business cycle is crucial for businesses and investors. It helps them predict future conditions, affecting their budgeting, business planning, and investment decisions. This understanding is essential for making informed investment decisions, including timing investments, matching risk tolerance with market conditions, and identifying sector opportunities.

The business cycle also affects other macroeconomic variables such as unemployment, inflation, consumer demand, consumer confidence, and business investment. The central bank and the government try to influence the economy to achieve macroeconomic goals such as high economic growth, low, stable inflation rates, or low unemployment rates.

The business cycle has various cycles within it, such as the Juglar cycle, which lasts about 8-11 years, and the Kondratieff cycle, which lasts an average of 50 to 60 years and has two feature phases. The Kitchin cycle lasts about 40 months or 3-5 years, and the Kuznets cycle lasts about 15 to 20 years and is associated with investments in housing and building construction.

On the monetary side, the central bank lowers interest rates or takes other loose monetary measures during the trough phase to stimulate economic growth. Lower interest rates lower borrowing costs, encouraging households to increase spending.

In recent history, the business cycle has manifested in events such as the Great Depression and the Great Recession that occurred during the 2008-2009 crisis. These periods underscore the importance of understanding and predicting the business cycle to mitigate economic downturns and promote sustainable economic growth.

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