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What are Business Cycles (Economic Cycles) and What Causes Them?

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The business cycle is something you will frequently hear economists mention.  It is often discussed in relation to a countries economic performance or how markets are behaving on a global scale. It seems to be quite an important concept so what does it actually refer to?

What is the Business Cycle?

The business cycle is also sometimes referred to as the economic cycle. It is concerned with the fluctuations that occur in an economy over a period of time.  The economic cycle typically occurs over a few years and will involve a period of rapid economic growth after which things slow down and then growth declines. The term ‘business cycle’ would seem to suggest that this process is predictable and constant but this is not the case; in fact these business cycles can be very unpredictable.  One of the main ways that a country’s business cycle is tracked is through observing changes in GDP.

The business cycle is often said to go through four stages; expansion, peak, contraction, and trough. During expansion there is an increase in the amount of economic activity occurring in a country and this continues until the peak of activity is reached. After the peak the economy begins to go through a period of contraction and economic activity begins to slow down; this continues until the trough where the bottom of the cycle is reached and economic activity once again begins to expand. This business cycle is a fair representation of what occurs in economies but it is important to keep in mind that the real world is a lot more complicated and these cycles can really be unpredictable.

What Causes a Business Cycle?

There are complex reasons for why the business cycle occurs but it can be explained in quite a simple manner as well. As an economy expands it and there is rapid economic growth it almost always leads to inflation and things just become more expensive to buy. The rising costs cause industry to slow down their growth and this leads to the economic contraction. This is why governments often apply a lot of effort to controlling inflation because it is that that often precipitates and economic slowdown.

The business cycle is a useful theory and helps people understand what is occurring in economies around the world. It should be remembered though that when it comes to the real world that economies will not follow a predictable cycle.

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