The business cycle is the natural rise and fall in economic activity that occurs over time. The cycle is measured by considering the growth rate of real gross domestic product (GDP). The stages of the business cycle are expansion (economic growth), peak (sustained high GDP growth), contraction (a period of falling GDP), and trough (the lowest point of contraction). There are different theories about what causes the business cycle, but most economists agree that a combination of various factors – both internal and external – contributes to its occurrence.
The business cycle has four phases: expansion, peak, contraction, and trough. Expansion is characterized by strong economic growth, high employment levels, and rising prices. Peak is the highest point of the cycle, when growth is at its strongest and the economy is operating at or near full capacity. Contraction follows peak, characterized by falling GDP, high unemployment, and declining prices. The trough is the lowest point of the business cycle, when growth is at its weakest and the economy is barely growing.
The business cycle is a key element of economics and can be used to help make decisions about investment, production, and other economic activity. Understanding where the economy is in the business cycle can help businesses make informed choices about how to best allocate resources. It can also help individuals understand what types of economic activity are likely to occur in the future and how it might impact their own financial planning.