Finance & Investment

A Short Introduction to the Business Cycle

Business cycles, also called business cycle analysis, is a statistical method that attempts to give a picture of a country’s or an organization’s (or group’s) long-term economic growth and performance. Business cycles are basically periods of economic activity followed by a contraction in economic activity. They also have implications for both the overall welfare of the population and for particular institutions. They are useful tools for identifying emerging trends, determining the course of future development, and forecasting future inflation. Business cycles also play an important role in macroeconomics, which study the movement of national resources, and their supply, among other economic concepts.

Reza Satchu

The most common business cycle is the business cycle that describes the ups and downs of Gross Domestic Product (GDP), measured at a particular time by economic experts. When the ups occur, that means that economy is on the rise. And when the down days come, it simply means that things are getting more difficult for the economy. This can be viewed from two perspectives: the short-term view, which suggest that there may be a tendency for business activities to increase after periods of economic expansion; and the long-term view, which suggest that there might be a tendency for business activities to decrease once periods of economic contraction.

Another aspect of the business cycle is the variation in financial indicators. Changes in economic cycles can be determined by looking into the variations of the following indicators: gross domestic product growth, price changes, interest rates, employment, and industrial production and employment, consumer prices, and government spending and deficits. Changes in these indicators can indicate varying economic cycles. For example, if the industrial production and employment go up, this will imply that business cycle is showing upward trends, while if the prices drop abruptly, investors will probably think that the economy is going down.