Phases of the Business Cycle
Economics (Year 11) - The Business Cycle (U2)
Peak / Boom
During this period of time, economic growth and total expenditure is high and usually exceeds the objective of 3¼%.
The characteristics of this phases include:
Rate of economic growth is above average
High levels of consumption expenditure
High level of confidence
Level of borrowing may be high
Relatively low levels of cyclical unemployment
Profit share of GDP is high
Firms are working near capacity (may be bottlenecks though)
Inflationary pressure (more demand pushes prices up)
A contraction phase, also known as a downswing or downturn, the high levels of economic activity found in a boom start to decline. This is because, as rates of output begin to decrease due to bottlenecks, limited labour supply and shortages as a result of the economy nearing maximum capacity, investment starts to decline. In a domino affect, as investment falls, output begins to decrease, unemployment rises and income falls: finally, reducing spending levels. Furthermore, another reason for contractions, as economic growth rises during booms, governments may introduce contractionary policies to ensure growth doesn’t spiral out of control and create hyperinflation. Therefore, governments and the Reserve Bank of Australia utilise monetary policy to raise interest rates or taxes in order to reduce spending. A final key feature of the contraction phase is how sudden it can occur. As opposed to the slow build up of economic growth as characterised by an upswing phase, a contraction can begin very suddenly and can sometimes be caused by economic events. For instance, The Great Depression (1929), The Global Financial Crisis (2008) and the COVID-19 pandemic (2020). These may lead to recessions, defined as two successive quarters of falling GDP Growth.
In the trough phase, GDP growth is under to objective of 3¼%. This is results in aggregate income, consumption and investment to fall below necessary levels for economic growth. In this stage, governments employ high levels of spending in order to boost the economy.
Slower growth of rates in retail spending
Low levels of confidence
Low company profits
Reduced pressure on prices
Rising levels of savings as households reduce spending
Phases of expansion, also known as upswings, are phases of increased economic growth after a trough. As a trough leaves businesses with reduced incomes, they will increase investment in an attempt to lower production costs by replacing outdated machines, in-turn, this increases output, unemployment falls, income increases and then spending rises. Another way that the economy is boosted is through government policies implemented in order to create jobs and reduce taxes and interest rates in order to support those unemployed. These factors and policies influence the economy to grow and expand until it reaches the boom. The level of economic activity gradually rises.