To know whether a country or a business should prepare for tough times ahead, economists and business analysts look at business cycles to explain how a business or an economy is doing. It has to be done because economic activities do not move at a constant and consistent pace.
What is a business cycle?
The business cycle is the irregular up and down movements of economic activity over several years. There are times when the economy moves slowly, while sometimes it grows at a faster rate than its average rate of growth. It consists of four basic phases: contraction, trough, expansion, and peak.
4 business cycle phases
A slow-paced economic activity, a company is in a contraction phase if it has greater liabilities than sales. If a country’s economy is in a contraction period, then it is in recession.
This phase shows a lower turning point. This is a transition stage from the contraction phase to the expansion phase.
The expansion phase indicates a faster movement of an economic activity. In a business cycle graph, the expansion phase shows a rise in the economic pace.
The peak phase is the final level of an economic activity. It is the highest point of economic growth.
What does a business cycle graph do?
Business cycle graphs show details on the present conditions of a company or a country’s economy. The rising and falling movements of the bars, lines, and other graph tools represent whether a business or an economy is growing and moving on its way to success or if it is going through rough times.
Economists use these graphs to track the direction of the economy. Indicators include specific areas of economic interests such as a country’s Gross Domestic Product, Gross National Product, and consumer spending.
Although business cycle graphs show the history of business or economic performance according to the business cycle, they do not make any forecast on future economic activities. Economic conditions are always fluctuating, making it impossible to predict how the economy will perform in the future.