Eco Business Cycle

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Four Phases of Business Cycle

Business Cycle (or Trade Cycle) is divided into the following four phases :-

1. Prosperity Phase : Expansion or Boo or !pswing of econoy.

". Recession Phase : fro prosperity to recession (upper turning point).

#. Depression Phase : Contraction or $ownswing of econoy.

%. Recovery Phase : fro depression to prosperity (lower turning &oint).

Diagram of Four Phases of Business Cycle

The four phases of 'usiness cycles are shown in the following diagra :-

The 'usiness cycle starts fro a trough (lower point) and passes through a recovery phase

followed 'y a period of expansion (upper turning point) and prosperity. fter the pea point is


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reached there is a declining phase of recession followed 'y a depression. gain the 'usiness

cycle continues siilarly with ups and downs.

Explanation of Four Phases of Business Cycle

The four phases of a 'usiness cycle are 'riefly explained as follows :-

1. Prosperity Phase

*hen there is an expansion of output+ incoe+ eployent+ prices and profits+ there is also a rise

in the standard of living. This period is tered as &rosperity phase.

The features of prosperity are :-

1. ,igh level of output and trade.

". ,igh level of effective deand.

#. ,igh level of incoe and eployent.

%. ising interest rates.

. /nflation.

0. arge expansion of 'an credit.

2. 3verall 'usiness optiis.

4. high level of 5EC (5arginal efficiency of capital) and investent.

$ue to full eployent of resources+ the level of production is 5axiu and there is a rise inGNP (6ross 7ational &roduct). $ue to a high level of econoic activity+ it causes a rise in prices

and profits. There is an upswing in the econoic activity and econoy reaches its Pea . This isalso called as a Boom Perio!.

". Recession Phase

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The turning point fro prosperity to depression is tered as ecession &hase.

$uring a recession period+ the econoic activities slow down. *hen deand starts falling+ the

overproduction and future investent plans are also given up. There is a steady decline in theoutput+ incoe+ eployent+ prices and profits. The 'usinessen lose confidence and 'ecoe

pessiistic (7egative). /t reduces investent. The 'ans and the people try to get greater

li8uidity+ so credit also contracts. Expansion of 'usiness stops+ stoc aret falls. 3rders arecancelled and people start losing their 9o's. The increase in uneployent causes a sharp decline

in incoe and aggregate deand. 6enerally+ recession lasts for a short period.

#. Depression Phase

*hen there is a continuous decrease of output+ incoe+ eployent+ prices and profits+ there is a

fall in the standard of living and depression sets in.

The features of !epression are :-

1. all in volue of output and trade.

". all in incoe and rise in uneployent.

#. $ecline in consuption and deand.

%. all in interest rate.

. $eflation.

0. Contraction of 'an credit.

2. 3verall 'usiness pessiis.

4. all in 5EC (5arginal efficiency of capital) and investent.

/n depression+ there is under-utili;ation of resources and fall in 67& (6ross 7ational &roduct).

The aggregate econoic activity is at the lowest+ causing a decline in prices and profits until the

econoy reaches its $rough (low point).

%. Recovery Phase


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The turning point fro depression to expansion is tered as ecovery or Revival &hase.

$uring the period of revival or recovery+ there are expansions and rise in econoic activities.

*hen deand starts rising+ production increases and this causes an increase in investent. Thereis a steady rise in output+ incoe+ eployent+ prices and profits. The 'usinessen gain

confidence and 'ecoe optiistic (&ositive). This increases investents. The stiulation of

investent 'rings a'out the revival or recovery of the econoy. The 'ans expand credit+ 'usiness expansion taes place and stoc arets are activated. There is an increase in

eployent+ production+ incoe and aggregate deand+ prices and profits start rising+ and

'usiness expands. evival slowly eerges into prosperity+ and the 'usiness cycle is repeated.

Thus we see that+ during the expansionary or prosperity phase+ there is inflation and during thecontraction or depression phase+ there is a deflation.

Relate! &rticles

What is Trade Cycle? Meaning, Definition, Features and Types

Introduction To Managerial Economics - Indian Economics 1

What is usiness ? Meaning, Definitions, Features of !!!

LinkWithin

% Phases of Business Cycle in Economics 'ith Diagram

&tom Fee! of (alyan City )ife Blog * (C)
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