A business cycle is the regular swings in economic activity, measured by original GDP, that occur in most economies, varying from boom conditions to recession when total national output declines. It is close to impossible for economic growth to be achieved at a steady, constant rate, rather economies grow at different rates over time, and this is when business cycle is built.
There are four stages of a business cycle which defines each form of economic ups and downs.
- Boom: Boom is a period in which there is a fast economic growth with an increase in the incomes and profits. However, with economic growth comes a major downfall. Due to the increase in demand for goods and services, and the less amount of labor, force available in the market leads to increase in wages and of course, introduces inflation within the economy. Due to inflation, the government or central bank increases interest rates to reduce inflationary pressure. Boom may be a favorable situation for many stakeholders, but it does not last for a long time. Along with increased demands and wages, boom attracts inflation towards it.
- Downturn or recession: The effect of falling demand and higher interest rates commences in this stage. The growing economy goes down either rapidly or slowly. The real gross domestic product as known as the GDP growth slows down and may or may not commence to fall. This process is known as recession. Incomes and consumer demand fall and profits are much reduced. Recession is not at all welcomed by any organization, especially not employees. Since the demand is falling no more employees would be needed, which is why they are fired and the rate of unemployment starts to increase. Some firms will record losses and some businesses would find it tough to survive.
- Slump: No government or firm would like to go through the stage of slump. It is a serious and long downturn or recession can lead to a slump where the real gross domestic product or GDP decreases drastically and the prices of plots and assets decrease alongside. This situation occurs when the government fails to take accurate economic action to resist further dramatic slump situations. Unlike with the great world slump of the 1920s most governments took the necessary action to halt the 2009 recession becoming a major slump.
- Recovery and growth: Not all recessions mostly last forever; there is eventually a recovery when real gross domestic product starts to accelerate.