Jul 19, · Stages of the Economic Cycle. The economic cycle goes through four stages: Expansion; Peak; Contraction; Trough. Once the cycle is complete, it continues from the start again. No definite rule exists in determining how long each phase lasts; in fact, expansion phases can last many years before hitting a peak. Jun 05, · An economic cycle consists of four stages: expansion, peak, contraction, and trough: Source: investhandbook. The expansion is characterized by positive economic indicators: The GDP grows at a healthy rate. The unemployment rate remains low. Inflation reaches the 2 percent target. Debts get paid on time.
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We have entered the late upswing stage of the economic cycle. The recovery stage was between , and the early upswing stage occurred between The late upswing stage will end when bond yields stop rising, the stock market starts falling, home prices fall, and consumer confidence drops. The different stages of the economic cycle tend to be gradual and go on longer than people expect. Jun 11, · The U.S. economy entered the contraction phase of the business cycle in February In response to the COVID pandemic, state governments closed non-essential businesses in March. By April, there were million unemployed, sending the unemployment rate to %. Stages of the Economy. Economic cycles are identified as having four distinct economic stages: expansion, peak, contraction, and trough. An expansion is characterized by increasing employment, economic growth, and upward pressure on prices. A peak is the highest point of the business cycle, when the economy is producing at maximum allowable output, employment is at or above full .
In this section, we will consider the economy over time, introducing the concepts of the economic cycle and the four distinct and recognizable albeit, sometimes in hindsight stages of the economy. This section builds on learning from the prior section on economic indicators, associating economic stages with identifying characteristics in terms of the priorities of growth, employment and prices.
The scenario in this section illustrates the impact of the economic cycles on a small business and the ripple effect on customers, workers and suppliers. The term economic cycle or boom-bust cycle refers to economy-wide fluctuations in production, trade, and general economic activity. From a conceptual perspective, the economic cycle is the upward and downward movements of levels of GDP gross domestic product and refers to periods of expansion and contraction in the level of economic activities business fluctuations around a long-term growth trend.
Economic cycles are identified as having four distinct economic stages: expansion, peak, contraction, and trough. An expansion is characterized by increasing employment, economic growth, and upward pressure on prices. A peak is the highest point of the business cycle, when the economy is producing at maximum allowable output, employment is at or above full employment, and inflationary pressures on prices are evident. Following a peak, the economy typically enters into a correction which is characterized by a contraction where growth slows, employment declines unemployment increases , and pricing pressures subside.
The slowing ceases at the trough and at this point the economy has hit a bottom from which the next stage of expansion and contraction will emerge. Since the economy is made up of businesses both private and public , businesses are impacted by the stages of the economy or perhaps they cause the stages of the economy—or maybe a little of both! When we move from talking about stages of the economy, the terms used to describe the business cycle differ slightly, but you will see that they are almost mirror images of the economic stages.
Business cycle fluctuations occur around a long-term growth trend just like economic cycles, but unlike economic cycles they are measured in terms of the growth rate of real gross domestic product Real GDP. Instead, real gross domestic product is the inflation adjusted value of the goods and services produced by labor and property located in the United States. An expansion is the period from a trough to a peak, and a recession is the period from a peak to a trough.
If the economy does not begin to expand again, then the economy may be considered to be in a state of depression. How the economic cycle affects business operations may be best explained by looking at how one business responds to these cycles. Normal Maintenance is a small business that provides a variety of construction services to homeowners.
They specialize in roofing, deck installations, siding, and general home maintenance. They employ three full-time workers, who typically work forty hours per week for an average of twelve dollars per hour. The company has been in business in the same town for more than twenty years and has a solid reputation for quality work and reliability. Normal Maintenance is busy and has recently had to turn down jobs because it lacks the capacity to do all the work offered.
Homeowners now want to make home repairs and improvements which they had to put off during the sour economy. With the economy improving, others are fixing up their homes to sell. Faced with so much demand, the owner of Normal Maintenance must decide whether to pay his existing workers overtime which will increase the costs for each job and reduce profits or hire additional workers. The competition for qualified construction labor is steep, and he is concerned that he will have to pay more than his usual rate of twelve dollars per hour or possibly get workers who are not as qualified as his current crew.
He is, however, able to charge higher prices for his work because homeowners are experiencing long waits and delays getting bids and jobs completed. The owner purchases a new truck and invests in additional tools in order to keep up with the demand for services. Customers are willing to pay more than usual so they can get the work done. Business is expanding to such an extent that Normal Maintenance and its suppliers are starting to have trouble obtaining materials such as shingles and siding because the manufacturers have not kept pace with the economic expansion.
In general, business is great for Normal Maintenance, but the expansion brings challenges. As a result, the crews are exhausted and the quality of their work is beginning to decline. Jobs are getting started and completed late as the crews struggle to cover multiple job sites.
As a result, customer complaints are on the rise, and the owner is worried about the long-term reputation of the business. Neither the business nor the economy can sustain this level of activity, and despite the fact that Normal Maintenance is making great money, everyone is ready for things to let up a little.
As the economy begins to contract, business begins to slow down for Normal Maintenance. The owner is able to reduce his labor costs by cutting back on overtime and eliminating weekend work. When the phone does ring, homeowners are asking for bids on work—not just placing work orders. Normal Maintenance loses out on several jobs because their bids are too high.
The company begins to look for new suppliers who can provide them with materials at a cheaper price so they can be more competitive. In general, competition for work has increased and some of the businesses that popped up during the expansion are no longer in the market. During the week before, they worked only three days, and the owner is down to his original crew of three employees.
Several months ago he laid off the workers hired during the expansion. Without enough working capital to keep the doors open, some are forced to close down. Representatives from supply companies are stopping by the office hoping to get an order for even the smallest quantity of materials. The new truck and tools that the owner purchased during the boom now sit idle and represent additional debt and costs. The owner increases his advertising budget, hoping to capture any business that might be had.
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