Business Cycle

Business cycle is a notion which denotes regular oscillation of business activity ranging from the economic upswing to cutback of economic activity. Cycle behavior of economics exerts a great impact on forex. Regarding the changes which business cycle provokes, financial experts take appropriate decisions. The knowledge of the notions connected with business cycle and the rules to apply to is instrumental for a trader.

There are several distinguishable phases in business cycle: peak, recession, trough, recovery, expansion. Peak is the upper turning of a business cycle. At this point unemployment is theoretically achieving its lowest level or disappears at all. The economics functions at its maximum, i.e. the industry engages all the capital and labor resources. The peaks sometimes encourage inflationary pressure.

Recession is a general slowdown in economic activity, drop in productions, employment rate and incomes. According to the degree of economic slowdown the recession can be characterized as crisis and depression.

Trough shows the lowest level of employment and productions. The trough is not actually long lasting and foreshadows the soonest recession end.

Recovery is a stage of industrial growth. Many economists claim that low level inflation rates can be attributed to this phase. Money incomes begin to increase and the effective demand is revived.

Expansion is continuation of revival. More businesses benefit from a good economy, not just a few businesses in specific industries. The unemployment rate declines approaching the full employment rate of about 5% if not lower. Investment and consumption being aggregate expenditures on gross domestic product increase. The expansion stage may involve several more cycles which are called growth cycles.

Business Cycle Phases

There are other factors which influence the business cycle. Among them there are seasonal fluctuations and long term tendencies. Seasonal fluctuations manifest themselves at a definite period of year, for example, before Christmas or Easter when there is a remarkable rise in business activity especially in retailing. Seasonal fluctuations can also be noticed in agriculture, automotive industry and building. Long term tendencies can last for a century which can reflect long term rise or drop in economic growth.

Business cycle is often associated with the overall production. The production volume measured in gross domestic product (GDP) is a reliable indicator of the economic climate. It is important to note that business cycle at its expansion stage does not reveal itself in the GDP’s growth but in the growth rate itself. If the growth rate is negative for a particular period of time (more than 6 months), it points to the economic recession. In case the growth rates remain rather high from month to month, this is a marker of the economic peak.

The cycle fluctuations are essential to differentiate from non-cycle fluctuations. The cycle fluctuations cause changes in all the indicators grasping all the sectors while non-cycle fluctuations incorporate only some sectors characterized by the seasonal aspect.

The reasons for the business cycles are various. Some economists associate economic blooming with significant inventions (like railways or synthetics). The irregular character of such inventions preconditions economic cyclicality. According to some other points of views, business cycles occur in consequence of wars and after them, period of peace. Another group of economists claim that the business cycle is determined by the events happening in the monetary-credit sphere. For example, the increase in money supply including cash or credit instruments stimulates economics while money supply reduction hinders its further development.