business cycle

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Business cycle

Repetitive cycles of economic expansion and contractions. The official peaks and troughs of the US cycle are determined by the National Bureau of Economic Research in Cambridge, MA.

Business Cycle

The continuous expansion and contraction of economic growth in fairly regular intervals. That is, a business cycle involves GDP growth and the creation of wealth for a period of time, followed by overheating and a recession. When the recession reaches its bottom the business cycle starts again. Some economists believe that the length and strength of business cycles are easily predictable, while others dispute this. A business cycle is seen as an inevitable part of the capitalist system. It is informally called a boom-and-bust cycle. See also: Industry Life Cycle, Kondratiev Wave.

business cycle

The somewhat irregular but recurring periods of change in economic activity over time. A business cycle is generally divided into four stages: expansion, prosperity, contraction, and recession. The stage in which an economy operates has a significant impact on a firm's profitability and prospects. This impact is especially severe with respect to firms that experience large swings in sales and profits. Many analysts believe stock prices tend to lead the business cycle. Therefore, it is felt that bull markets begin before a period of expansion and that bear markets begin before a period of contraction.

business cycle

fluctuations in the level of business activity in an economy brought about by changes in demand conditions, particularly increases and decreases in investment spending. The business cycle is characterized by four phases, with the economy moving upwards from ‘depression’ through ‘recovery’ to ‘boom’ and back through ‘recession’ to depression once again. The depression stage of the cycle is characterized by a very low level of demand relative to supply capacity, accompanied by low levels of output, unsold stock and high unemployment. As demand picks up in the recovery stage, stock levels fall and output and employment increases. Boom conditions are characterized by full-capacity levels of output and employment, but with a tendency for the economy to ‘overheat’, producing inflationary pressures. The ending of a boom is followed by a period of recession, with falling demand leading to modest falls in output and employment at first but then accelerating into depression as demand continues to fall. In practice, however, governments attempt to use anticyclical FISCAL POLICY and MONETARY POLICY to stabilize the economy, aiming in general to keep total demand in balance with the supply capabilities of the economy thus avoiding undesirable output- and employment-losses as well as containing inflation. See ECONOMIC POLICY.
Business cycleclick for a larger image
Fig. 20 Business cycle. Fluctuations in the level of economic activity.

business cycle

or

trade cycle

fluctuations in the level of economic activity (ACTUAL GROSS NATIONAL PRODUCT), alternating between periods of depression and boom conditions.

The business cycle is characterized by four phases (see Fig. 20 ):

  1. DEPRESSION, a period of rapidly falling AGGREGATE DEMAND accompanied by very low levels of output and heavy UNEMPLOYMENT, which eventually reaches the bottom of the trough;
  2. RECOVERY, an upturn in aggregate demand accompanied by rising output and a reduction in unemployment;
  3. BOOM, aggregate demand reaches and then exceeds sustainable output levels (POTENTIAL GROSS NATIONAL PRODUCT) as the peak of the cycle is reached. Full employment is reached and the emergence of excess demand causes the general price level to increase (see INFLATION);
  4. RECESSION, the boom comes to an end and is followed by recession. Aggregate demand falls, bringing with it, initially modest falls in output and employment but then, as demand continues to contract, the onset of depression.

What causes the economy to fluctuate in this way? One prominent factor is the volatility of FIXED INVESTMENT and INVENTORY INVESTMENT expenditures (the investment cycle), which are themselves a function of businesses’ EXPECTATIONS about future demand. At the top of the cycle, income begins to level off and investment in new supply capacity finally ‘catches up’ with demand (see ACCELERATOR). This causes a reduction in INDUCED INVESTMENT and, via contracting MULTIPLIER effects, leads to a fall in national income, which reduces investment even further. At the bottom of the depression, investment may rise exogenously (because, for example, of the introduction of new technologies) or through the revival of REPLACEMENT INVESTMENT. In this case, the increase in investment spending will, via expansionary multiplier effects, lead to an increase in national income and a greater volume of induced investment. See also DEMAND MANAGEMENT, KONDRATIEF CYCLE, SECULAR STAGNATION.

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Bouwman (2009) finds that many mergers take place at the peak of the business cycle, while these enjoy significantly higher announcement returns (increase in stock price when the merger is announced).
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Accordingly, the main goal of this work is the integration of the business cycle approach to the construction of optimal investment portfolios.
In this section, we investigate how capital flow shocks affect the business cycle dynamics of the Asia Pacific countries: for example, whether capital flows generate boom-bust cycles, and whether capital flows help explain the synchronization of the business cycles in the Asian countries.
The authors' regression analysis shows that employment and unemployment are more sensitive to the business cycle for the foreign born than for the native born.
However, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), the arbiter of U.
This takes into account the possibility that one particular country, because of its size, has a contemporaneous spillover effect on the business cycle of the other members.
Hence, for example, the discussion of Spiethoff is focused around the transition from viewing individual crises as distinct and unrelated phenomena to viewing individual crises as possessing a family likeness sufficient to warrant a theory of the business cycle.
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