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What is an Economic Cycle?

  • Published On 22-Aug-2022
What is an Economic Cycle?

An economic cycle is quite a general term and is not only relatable at the state level but also at the individual level. It is a very significant phenomenon that everyone must feel obliged to understand, as it helps the investors and business executors make secure investments.

What is an Economic Cycle?

An economic cycle is a cyclic phenomenon that occurs to and fro between the growth or expansion of the economy and its recession. Occurring in 4 stages, an economic cycle can have a very grave impact on your net worth as it affects everything from stocks and bonds to profit and corporate earnings through real estate.

What Factors Affect the Economic Cycle?

An economic cycle gets influenced by a number of factors such as;

  • Gross Domestic Product
  • Interest Rates
  • Total Employment
  • Consumer Spending

What Are the Four Stages of an Economic Cycle?

Often referred to as a business cycle, an economic cycle signifies the circular movement of an economy from expansion to contraction. Growth is a hallmark of economic expansion. In contrast, a contraction involves a downward spiral of economic activity over a couple of months, which we refer to as a recession.

The economic cycle or business cycle takes place in four stages; expansion, peak, contraction, and through.

Expansion:

An economy in expansion generally grows rapidly, interest rates are low, production increases, and inflationary pressures increase.

Peak:

A cycle peaks when the rate of growth reaches its maximum. While the monetary growth is at its highest during peak duration, it is typical for peak growth to create some imbalances in the economy that must be rectified.

Contraction:

It occurs when growth slows, employment declines, and prices plateau during a period of contraction.

Through:

Growth begins to recover after the economy hits a low point and that is when the trough of the cycle is reached.

What Causes an Economic Cycle?

There are different schools of thought that suggest different reasons for an economic cycle to occur.

  • According to monetarists, an economic cycle is directly related to the credit cycle. They believe that economic activity and consumer spending are influenced by numerous factors such as interest rates, and the price of the debts.
  • On the other hand, Keynesians believe that changes in investment demands influence spending and employment, and thus in return economic cycle. According to this approach, we can say that fluctuation in different industries such as real estate also affects the economic cycle.

How To Manage Economic Cycles?

Different institutes manage economic cycles differently. However, the most common ways to manage an economic cycle include; fiscal policy being employed by the government and may include deficit spending and a budget surplus.

Monetary policy is adopted by central banks to manage economic cycles that are followed by lowering interest rates and implementing expansionary monetary policy to give a boost to investments. While during expansion, the exact opposite of these measures is adopted and implemented by the banks.

Investors thrive through the economic cycle by making different types of investments. For example, during the time of expansion investors prefer basic energy sectors, capital goods, and technology. While during times of recession, investors buy companies that are in demand even during such times. These companies include healthcare and utilities.

The only industry that stays in demand during both of these times is the real estate industry.

Hence, the phenomenon of an economic cycle is essential to be understood not only to keep your business functional but also to make secure investments. As a deep understanding of these cycles enables to invest and withdraw money at the right time.