The term “business cycle” is composed of periods of good trade characterized by : rising prices, low unemployment alternating with the periods of bad trade characterized by : falling prices and high unemployment.

In other words, Every country witness boom and depression. These changes of boom and depression are generally cyclical in nature. Hence called as business or trade cycles. OR Rhythmic fluctuations in an economy, at intervals in form of boom and depression are called as business cycles.


Business cycle are identifies as having four different phases:-



This phase represents the best stage of prosperity. The objective of national economic policy is to attain this stage. The main characteristics of this stage basically includes :

  • Earning huge profits
  • Increase in investment and share prices
  • High interest rate
  • Increase in income is more than increase in investment
  • Economy reaches full employment hence increase in prices and wages
  • Expansion of bank credit and hence increase in investment 



Under the phase of boom or expansion, investment in certain ventures do not prove to be profitable. Any increase in investment beyond the level of full employment will increase the interest, wages and other costs. In this phase there is decline in economic activities. The main characteristics of this stage are as under :

  • Profits fall
  • Income falls many times more than the fall in investment
  • Workers are rendered unemployed and there is fall in prices and wages
  • demand for goods fall
  • sharp decline in stock of goods
  • Hence feeling of fear and doubt among people which gives way to pessimism.



Under depression, fall in the prices of raw material is more than the fall in finished goods. Once this process of recession starts it becomes impossible to stop the rot and hence, all the economic factors have a tendency to contract in case of recession. Its salient features includes :

  • Demand for goods fall
  • Unemployment increases and hence fall in prices, wages and interest
  • Level of income and output is low
  • Overall investment also declines
  • People go pessimist



 Just like any other phase, depression also cannot last forever. Due to depression, depleted or worn machines are not even replaced. So now it becomes necessary to buy new machines which results into increase in demand of capital goods and process of recovery will began gradually. This wave of recovery once initiated will began to feed itself. Its common features includes :

  • Replacement investment will cause the income and output to increase
  • Increase in employment hence the prices and wages will began look up
  • More profits
  • Investment increases
  • Pessimism gives way to optimism.



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