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What actually is a business cycle and how does it work? What are the important characteristics we should know about?
A business cycle is the term for the recurring fluctuations in economic activity.
A recession—also sometimes referred to as a trough—is a period of reduced economic activity in which levels of buying, selling, production, and employment typically diminish.
This is the most unwelcome stage of the business cycle for business owners and consumers alike.
Macroeconomic indicators such as GDP (gross domestic product), investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise.
In the United Kingdom, it is defined as a negative economic growth for two consecutive quarters.
During this period, the average business cycle lasted about five years; the average expansion had a duration of a little over four years, while the average recession lasted just under one year.
The chart shows the periods of expansion and recession for the Composite Coincident Indicator Index from 1959 to 2002.
In the United Kingdom, recessions are generally defined as two consecutive quarters of negative economic growth, as measured by the seasonal adjusted quarter-on-quarter figures for real GDP.
The business cycle affects everyone, from the busy banker to a simple utility worker.
These two words mean a lot in daily broadsheets because the effects can be tremendous enough to shake the entire stock market and bring people out of job.
When the slowing down hits a bottom level, that is called a trough, after which a period of recovery follows.
The growth or expansion period happens when the economy starts to pick up again until it reaches a peak or when the economy reaches a state of unreasonable exuberance.