Business cycle, also known as economic cycle, consists of a alternating and irregular fluctuations in economic activity in a region. The economic activity is measured by real GDP.
A business cycle is commonly classified into four phases:
- Recession: A recession is period in which the total income, output and employement declines. Many sectors of economy show contraction in business activities such as buying, selling and production. Both consumers and producers start to face hardships in this stage of business cycle.
- Trough: In this phase, the contraction in business activities which started in recession phases reaches minimum level. THe level of output and unemployment stands still for some duration at the lowest level.
- Expansion: The output and employment level starts to rise again and economy continues to expand beyond the maximum level achieved in past and thus the long-term trend of real GDP is positive.
- Peak: The expansion phase ends with economic activity at peak. In peak phase, business activity reaches the maximum potential of an economy at which it operates at or near full capacity. Unemployement reaches minimum level and prices are likely to rise.
Business cycles are irregular both in duration and intensities. This is also true from individual phases in a business cycle. There have been recessions which were only few months to a number of years in duration.