Key Phases of Business Cycles in Macroeconomics

Business cycles are the ups and downs that the economy goes through over time. There are four main parts of these cycles:

1. Expansion

   • This is when the economy is growing.
   • People are working, and businesses are making more products.
   • During this time, the economy grows by more than 2.5% each year.
   • Because things are good, people feel confident and spend more money.

2. Peak

   • This is the highest point of the economy before it starts to go down.
   • Everything is at its best here: jobs are plentiful, and companies are producing a lot.
   • For instance, the unemployment rate can drop to as low as 3.5%.
   • Prices might go up too, often more than 4%.

3. Contraction (Recession)

   • Now, the economy starts to shrink.
   • This means that the overall economic growth (GDP) goes down for two quarters in a row.
   • During a recession, job loss increases, with unemployment often over 6%. In tough times, it can even hit 10%.
   • People spend less money, and businesses might make fewer products and invest less.

4. Trough

   • This is the lowest point of the economy before things start to get better.
   • It’s a tough time with lots of people out of work, low confidence from consumers, and less production happening.
   • History shows that the time to recover can differ greatly; for example, after the Great Recession in 2008, unemployment reached 10% before things began to improve.

Knowing these phases helps economists and policymakers understand how the economy is doing and what steps to take to help it improve.