Business Cycle

BUSINESS CYCLE

A business cycle will happen is due to the fluctuations that happen in the economy and cause the economic growth started to have a changes. On the other hand, the actual growth will change according to the business cycle. In the business cycle, there have four phases which are included recovery, peak, downturn and recession. See the diagram below (Diagram 1).

National Output

Peak

Downturn

Recovery

Recession

Time

Diagram 1

The recovery period in the business cycle is mean a stagnant economy started to recover and growth in actual output start to continue. This phase is can also define it as gradual or upturn. Recovery period is started when the price start to stop falling in the economy. When inventory is exhausted then the recovery will be happen at this time. Since there is an exhausted in inventory, so the producers will begin to take some actions to satisfied the demands. The actions will tend to generate more employment chances and income which will lead again to the demand for consumer goods. This will lead to price correction and also the relationship between the costs and prices. It started to pick up. The profits began to replace the losses and recovery set of momentum. At this time, due to the price rise so it will encourage all the companies to do new investment and business projects. Besides, during this recovery period the economy will reach to a stage of prosperity or wealth.

Another phase that comes from the business cycle is peak. Peak is mean the there is a risen in economic output and it has risen to the highest level. When it rises to the highest level, it is mean that the resources have been fuller used and the gap between actual and potential output become narrows which can name it as output gap. It may also know as boom or prosperity phase. At this phase, the demand start to increase therefore the raw materials and labors will also increase. Since the demand increase so short supply will happen then...