Business Cycle

The business cycle or economic cycle refers to the fluctuations of economic activity about its long term growth trend. The cycle involves shifts over time between periods of relatively rapid growth of output (recovery and prosperity), and periods of relative stagnation or decline (contraction or recession). These fluctuations are often measured using the real gross domestic product.

Business cycle diagram

There are four main stages in a trade cycle or business cycle.


GDP is rising
Unemployment is falling
Business are experiencing rising profits
‘Feel good’ factor among the people as their incomes are rising.


Results from too much spending.
Economy experiences rapid inflation
Factors of production become expensive


Results from too little spending.
GDP is falling
Demand in the economy will fall leading to closure of firms and unemployment


High level of unemployment.
Business will rapidly close down creating serious consequences for the economy.