The business cycles are often studied by policymakers, investors and economists. With the help of past economic patterns, potential investment opportunities and future trends can be identified.
Among clues for an economic expansion include unemployment claims, hours worked by employees in the manufacturing sector interest rates and capital expenditure. This is the business cycle following a recession that is characterized by improving or sustained business activities including significant growth in the gross domestic product, a decrease in unemployment and an increase in income.
In an economic recovery, the economy adapts to the policies and rules rolled out by the central bank and the government including the recession triggers. It also involves re-employing of other productive resources in the economy that were tied up during the recession. This sets up for a new expansion. Economic expansion refers to the phase of a business cycle where the GDP grows for two or more consecutive quarters and moves from a trough to a peak.
On the other hand, economic recovery refers to the business cycle following a recession that is characterized by improving or sustained business activities. In an economic expansion, the economy moves from a trough to a peak. On the other hand, in an economic recovery, the economy moves from a recession.
Measures of economic expansion include unemployment claims, hours worked by employees in the manufacturing sector interest rates and capital expenditure. On the other hand, the measure of an economic recovery includes leading indicators such as the stock market and lagging indicators such as employment.
Both refer to an improvement in overall economic performance. Working Economics Blog. Posted May 31, at am by Andrew Fieldhouse. Search for:. Sign up to stay informed New research, insightful graphics, and event invites in your inbox every week. Follow EPI. Track us on Twitter Tweets by EconomicPolicy. A peak is the highest point of the business cycle, when the economy is producing at maximum allowable output, employment is at or above full employment, and inflationary pressures on prices are evident.
Following a peak, the economy typically enters into a correction which is characterized by a contraction where growth slows, employment declines unemployment increases , and pricing pressures subside.
The slowing ceases at the trough and at this point the economy has hit a bottom from which the next stage of expansion and contraction will emerge. Since the economy is made up of businesses both private and public , businesses are impacted by the stages of the economy or perhaps they cause the stages of the economy — or maybe a little of both!
When we move from talking about stages of the economy, the terms used to describe the business cycle differ slightly, but you will see that they are almost mirror images of the economic stages. Business cycle fluctuations occur around a long-term growth trend just like economic cycles, but unlike economic cycles they are measured in terms of the growth rate of real gross domestic product Real GDP.
Instead, real gross domestic product is the inflation adjusted value of the goods and services produced by labor and property located in the United States.
An expansion is the period from a trough to a peak, and a recession is the period from a peak to a trough. If the economy does not begin to expand again, then the economy may be considered to be in a state of depression. How the economic cycle affects business operations may be best explained by looking at how one business responds to these cycles. Normal Maintenance is a small business that provides a variety of construction services to homeowners.
They specialize in roofing, deck installations, siding, and general home maintenance. They employ three full-time workers, who typically work forty hours per week for an average of twelve dollars per hour. The company has been in business in the same town for than twenty years and has a solid reputation for quality work and reliability.
Normal Maintenance is busy and has recently had to turn down jobs because it lacks the capacity to do all the work offered. Homeowners now want to make home repairs and improvements which they had had to put off during the sour economy. With the economy improving, others are fixing up their homes to sell.
Faced with so much demand, the owner of Normal Maintenance must decide whether to pay his existing workers overtime which will increase the costs for each job and reduce profits or hire additional workers.
The competition for qualified construction labor is steep, and he is concerned that he will have to pay more than his usual rate of twelve dollars per hour or possibly get workers who are not as qualified as his current crew.
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