Business cycle - what is it and how does it affect the economy?

Business cycle is a phenomenon that affects every market economy. It involves regular fluctuations in economic activity in a country around its long-term trend. In other words, the business cycle shows how the economy changes over time, going through periods of growth and decline. The business cycle is important for socio-economic life because it affects the level of production, employment, incomes, prices, investments, and consumption. Understanding the business cycle allows for better forecasting of future changes and taking appropriate actions to manage risks and take advantage of development opportunities. Phases of the business cycle The business cycle consists of four phases: decline, recession, growth, and prosperity. Each of them is characterized by a different state of the economy and requires different economic policies. Below, we present the characteristics and effects of each phase of the business cycle. Decline phase The decline phase is a period in which economic activity begins to decrease, moving away from its peak. During this phase, we observe a decrease in production, sales, and an increase in unemployment. There is an economic slowdown, and investments are limited. The causes of the decline phase may include a decrease in market demand, tightening credit conditions, worsening consumer and investor sentiment, or external shocks such as financial crises, war, or pandemics. The decline phase is unfavorable for the economy because it leads to waste of resources, loss of income, and deterioration in quality of life. To mitigate the effects of the decline phase, authorities may use fiscal and monetary policy measures such as cutting taxes, increasing public spending, lowering interest rates, or printing money. Recession phase The recession phase is a period in which economic activity declines and lasts for at least two consecutive quarters. During this time, we observe a decrease in GDP, an increase in unemployment, and consumers reducing their spending. Recession is the worst phase of the business cycle because it signifies a deep economic crisis that can have long-lasting and negative effects. Examples of recessions are the Great Depression of the 1930s or the Great Recession of 2008-2009. The causes of a recession may include a collapse in the real estate market, bankruptcy of large firms, or a lack of trust in the financial system. To emerge from a recession, authorities may use fiscal and monetary policies such as implementing stimulus programs, rescuing banks, or introducing quantitative easing programs. Growth phase The growth phase is a period in which economic activity starts to increase, moving away from its trough. During this phase, we observe growth in production, sales, investments, and a decrease in unemployment. This is a time when the economy grows and reaches new highs. The growth phase is beneficial for the economy because it leads to an increase in resources, incomes, and improvement in quality of life. The causes of the growth phase may include an increase in market demand, improved credit conditions, better consumer and investor sentiment, or external shocks such as the discovery of new technology or peace in the world. To sustain the growth phase, authorities may use fiscal and monetary policies such as maintaining low tax rates, increasing public investments, keeping low-interest rates, or controlling the amount of money. Prosperity phase The prosperity phase is the peak of the business cycle when the economy reaches its highest level of activity. During this period, national income increases, and investors make profits. The prosperity phase is desirable for the economy because it signifies a high level of prosperity and development. The causes of the prosperity phase may include high innovation, efficiency, and competitiveness of the economy, a strong position in international markets, or political and social stability. However, excessive expansion can lead to excessive inflation and the creation of speculative bubbles that can threaten economic stability. To prevent the economy from overheating, authorities may use fiscal and monetary policies such as raising taxes, limiting public spending, raising interest rates, or reducing the amount of money. Conclusion The business cycle is a phenomenon that affects every market economy. It involves regular fluctuations in economic activity in a country around its long-term trend. The business cycle consists of four phases: decline, recession, growth, and prosperity. Each of them is characterized by a different state of the economy and requires different economic policies. The business cycle is important for socio-economic life because it affects the level of production, employment, incomes, prices, investments, and consumption. Understanding the business cycle allows for better forecasting of future changes and taking appropriate actions to manage risks and take advantage of development opportunities.