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Business Cycles in Economics

Since the Industrial Revolution, the economies of the United States and many other countries have grown tremendously. That growth has transformed countries and greatly improved living standards. Yet even in prosperous countries, economic expansion has been periodically interrupted by episodes of declining production and income and rising unemployment. Sometimes these episodes have been severe and prolonged. But whether brief or more extended, decline economic activity have been following almost invariably by a resumption of economic growth.

This repeated sequence of economic expansion giving way to temporary decline followed by recovery, is known as the ‘business cycle’. The business cycle is a central concern in macroeconomics because business cycle fluctuations – the ups and downs in overall economic activity – are felt throughout the economy.

Countries have experienced ups and downs in overall economic activity since they began to industrialize. Economists have measured and studied these fluctuations for more than a century. Marx and Engels referred to “commercial crisis”, an early term for business cycle, in their Communist Manifesto in 1848. In the United States, the National Bureau of Economic Research (NBER) pioneered in business cycle research. They define: “they are a type of fluctuation found in the aggregate economic activity of nations that organize their work mainly in business enterprises. A cycle consists of expansions occurring at about the same time in many economic activities, followed by similarly general recessions, contractions and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic; in duration of business cycles vary from more than one year to ten or twelve years.”

Aggregate economic activity: Business cycles are defined broadly as fluctuations of “aggregate economic activity” rather than as fluctuations in a single, specific economic variable such as real GDP. Although real GDP may be the single variable that most closely measures aggregate economic activity, such as employment and financial market variables.

Expansions and contractions: This is the period of time during which aggregate economic activity is falling is a contraction or recession. If the recession is particularly severe, it becomes depression. After reaching the low point of the contraction, the trough (T), aggregate economic activity begins to increase. The period of time during which aggregate economic activity grows is an expansion or a boom. After reaching the high point of the expansion, the peak (P), aggregate economic activity begins to decline again. The entire sequence of decline followed by recovery, measured from peak to peak or trough to trough, is a business cycle.

Peaks and troughs in business cycles are known collectively as turning points. One goal of business cycle research is to identify when turning points so there’s no simple formula that tells economists when a peak or trough has been reached.

Comovement: Business cycles do not occur in just a few sectors in just a few economic variables. Instead, expansions and contractions occur at about the same time in many economic activities. The although some industries are more sensitive to the business cycle then others, output and employment in most industries tends to fall in recessions and rise in expansions Many other economic variables,

also have regular and predictable patterns of behavior over the course of the predictable way over the business cycle is called comovement.

Recurrent but not periodic: The business cycle is not periodic, in that it does not occur at regular, predictable intervals and does not last for a fixed or predetermined length of time.

Persistence: the duration of a complete business cycle can vary greatly fro abut one year to more than a decade, and predicting it is extremely difficult. However, once recession begins, the economy tends to keep contracting for

a period of time, perhaps for a year or more. Similarly, an expansion, once begun usually lasts a while. This tendency for declines in economic activity to be followed by further declines and for growth in economic activity to be followed by more growth is called persistence. Because movements in economic activity have some persistence, economic forecasters are always on the look out for turning points, which are likely to indicate a change in the direction of economic activity.

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This article is in continuation with our previous articles on Economics which include Philips Curve, Solow’s Growth Model, Fiscal Policy, Monetary Policy

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