Business Cycle

Topics: Unemployment, Keynesian economics, Macroeconomics Pages: 4 (1157 words) Published: December 16, 2013
Four Phases of Business Cycle
Business Cycle (or Trade Cycle) is divided into the following four phases :- 1. Prosperity Phase : Expansion or Boom or Upswing of economy. 2. Recession Phase : from prosperity to recession (upper turning point). 3. Depression Phase : Contraction or Downswing of economy.

4. Recovery Phase : from depression to prosperity (lower turning Point). The four phases of business cycles are shown in the following diagram :-

The business cycle starts from a trough (lower point) and passes through a recovery phase followed by a period of expansion (upper turning point) and prosperity. After the peak point is reached there is a declining phase of recession followed by a depression. Again the business cycle continues similarly with ups and downs. Explanation of Four Phases of Business Cycle

The four phases of a business cycle are briefly explained as follows :- 1. Prosperity Phase
When there is an expansion of output, income, employment, prices and profits, there is also a rise in the standard of living. This period is termed as Prosperity phase. The features of prosperity are :-

1. High level of output and trade.
2. High level of effective demand.
3. High level of income and employment.
4. Rising interest rates.
5. Inflation.
6. Large expansion of bank credit.
7. Overall business optimism.
8. A high level of MEC (Marginal efficiency of capital) and investment. Due to full employment of resources, the level of production is Maximum and there is a rise in GNP (Gross National Product). Due to a high level of economic activity, it causes a rise in prices and profits. There is an upswing in the economic activity and economy reaches its Peak. This is also called as a Boom Period. 2. Recession Phase

The turning point from prosperity to depression is termed as Recession Phase. During a recession period, the economic activities slow down. When demand starts falling, the overproduction and future investment plans are also given up. There...
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