Business cycles relate to fluctuating growth in economies and are measured using the gross domestic product for respective countries. A business cycle has four phases, i.e. recession, slump, growth and peak. Task 1 includes a brief look at the business cycle of the UK economy over a five year period and explains the usefulness of business cycles to business organisations that need to plan for the future.
The Business Cycle
The business cycle relates to repetitive fluctuations of expansion and recession in an economy. Over the longer term an economy would normally experience a positive growth in output. Therefore, the business cycle can be defined as the ‘short-term fluctuation of total output around its trend path’ (Begg et al, 1997, 518).
Business cycles are measured using the gross domestic product (GDP), which is the basic measure of total output of goods and services, within a time period, normally a year.
Over time, output growth alternates between being positive or negative. The four stages of the business cycle are:
• Recession – in this scenario, there is negative growth in output in the economy between a given time period. In this phase, income and unemployment, for example, are declining. A recession is said to occur when GDP has declined for two consecutive time periods, normally two consecutive quarters
• Trough/Slump – here, GDP is at its lowest point on the business cycle
• Growth/Recovery – the economy, as measured by GDP has moved away from the slump into positive growth
• Peak – this is the highest point of the business cycle
In the UK, the business cycle tends to last between 6 – 10 years, although this cannot be guaranteed. In fact, as the cycles occur at different time intervals, some economists have disputed the existence of ‘cycles’ and are more comfortable referring to the up and down movements in the economy as ‘fluctuations’ instead.
Having said that, there are enough...