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What Are the Effects of the Business Cycle?

By Osmand Vitez
Updated: Jan 25, 2024

A business cycle is a naturally occurring phenomenon in a free market economy, and its effects include the expansion and contraction of a national economy. Expansion allows for more businesses to start operations, wages to increase, and supply output to meet increased consumer demand. After reaching a peak — which includes an equilibrium point between producers and consumers — an economy may begin a contraction, where it experiences negative growth. The effects of the business cycle can be wide ranging in this manner, extending from individuals to businesses to other economies.

Business cycles do not have any sort of regular timing or period of occurrence. Most free-market economies have several business cycles that tend to last from several months to several years. Economists measure these cycles and surrounding factors to determine the effects they have on all parties in the economy. It can be difficult to determine when a business cycle starts and stops at the most current moment. Therefore, economists measure historical business cycles and attempt to match the similarities to current economic conditions.

Economists measure the effects of the business cycle to first ascertain growth and expansion in a market. Full employment is common at the peak of many business cycles. At this point, economists believe that an economy can stay constant so long as no artificial interaction occurs from outside forces. Inflation should also be constant as no growth occurs, which naturally promotes inflation. Essentially, a business cycle peak indicates that all resources in an economy have an efficient use by producers.

During a contraction, the effects of the business cycle can be much wider than the growth and peak stages. As the business cycle enters a contraction phase, unemployment may increase, wages can decrease, and consumer confidence will begin to fall. Companies need to pull back on their production output in order to match reduced consumer demand. Government actions may increase as regulatory agencies often attempt to stem the negative effects, but in many cases, contractions in a business cycle are often part of destructive capitalism.

Business cycles tend to go in circles as expansion, peak, contraction, and troughs occur. Their effects, therefore, repeat at each stage. Extreme cycles can affect global economies as an especially severe downturn can affect more than one economy. Therefore, one country’s economy can force another country’s economy into a contraction period due to the strong connection between the two.

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Discussion Comments
By fify — On Jan 26, 2014

I think the worst impact of a recession is unemployment. People lose their jobs and may not be able to afford basic needs. Usually, the government starts programs for unemployment benefits at this time. And most of the unemployed do get their job back when the economy comes out of the recession and businesses can afford to hire again. But I think it wears out society.

Even when the economy is in boom again, people are not going to want to spend a lot for a while because of the trauma of unemployment and financial trouble they experienced before. This is going to make the economy grow more slowly than normal.

By candyquilt — On Jan 25, 2014

@ysmina-- It's true that a free market economy regulates itself and some ups and downs are inevitable due to the nature of growth. But it would be wrong to say that government policies have nothing to do with the business cycle. After all, monetary and fiscal policies are established by the government. And these policies can and do affect the direction of the economy.

After a period of growth, an economy will start experiencing downfall. This will happen because a large money supply and high spending leads to high inflation. But the government can intervene with monetary and fiscal policies to reduce inflation and pull the economy away from a recession.

By ysmina — On Jan 25, 2014

If most of the issues of an economy like high inflation, high prices, high exchange rates, poor trade and unemployment are due to the business cycle, why do we blame government for everything and expect them to fix it? It's not their fault.

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