Understanding The Business Cycle

Business cycles are identified by economists as inter-periodal fluctuations in the total economy of a country. A business cycle is characterized by four distinct phases, each of which passes through three economic cycles. In simple terms they are: capital-intensive, consumption-inelastic, and savings-inelastic. As we all know that the accumulation of capital is always underway, whereas the contraction of employment and output accompanies the accumulation of debts.

Business cycles are characterized by expansions and contractions of activity in the economy, with equal chances for both positive and negative outcomes. They also have major implications for the overall welfare of society and for individual institutions, including the government, financial institutions and households. For instance, in a period of credit binge, there is the potential for financial bubbles, with high house price, equity and asset values, as well as a rapid expansion of financial sector liquidity.


On the other hand, a period of credit depression and contraction in activity is accompanied by a recession (paleo), with falling investment, output and employment (deflationary) and lower investment and employment (cyclical) conditions. The business cycle has been shaped by these economic cycles since the 1950s, when it began to identify a trough in business activity after a boom and was followed by recessions. A similar trend can be observed today with the globalisation process.