Business cycle Essay Example | Topics and Well Written Essays - 1250 words

Business cycle - Essay Example The business cycle occurs in five distinct stages, which include growth, peak, recession, trough, and recovery. Whenever the business cycle is at recession, the business general, economic performance is bad (Elwell 123). In fact, it results to adverse economic elements such as inflation, unemployment, losses to corporation, and decline in investment levels. On the other hand, period of growth and peak are desirable in that they are characterized by strong economic signals such as high employment levels, price stability, profitability of firms, and high investment levels. It is therefore, preferable that the economy operates on growth or peak season. Three key economic variables that characterize a business cycle Economists have unearthed three causes of a business cycle, which include employment, inflation, and interest rates. During trough or recession period, the interest rates are high, which means that the cost of acquiring capital for investing is business is high. This, therefo re, implies that less people are taking up loans for investment. With investment levels low, the unemployment levels in the economy will go down. As such, trends continue to soar; the overall effect is that the economy may go into a trough. In order to revive the economy from such adverse trends, the government usually comes up with expansionary policies such as increasing public expenditure as well as reducing the rate of capital to encourage investment and reduce the unemployment rates. The other factor that characterizes the business cycle includes the issue of inflation. During the times of recession or trough, the economy is characterized by price volatility. The price of goods and services usually go up making life difficult for the majority of households. Whenever, the economy has high prices, the business cycle is affected negatively implying indirect relationship between inflation and business cycle. The other factor that affects business cycle is the issue of productivity. During peak and growth period since the economic cycle, the economy is always characterized by high productivity. Hamilton (119) says that it is important that government of the day and the management of various businesses put in place deliberate measures to ensure productivity through quality education and training, investment in infrastructure, and better government policies that encourage productivity. The good business environment in developed economies such as United States of America examines why their economy is rarely affected by adverse economic cycle such as recession and trough. Characteristics of Recession Economic pundits refer to recession as a period exceeding two quarters in which an economy is grappling with a negative trend in GDP. The major characteristic of recession is a reduction in investment spending. During periods of recession, the interest rates are always high which in turn results to increase in cost of capital (Smiley 221). Increase in cost of capital makes it very expensive to service loans hence less money is available for investment. The other critical characteristic of recession is high unemployment rate. During recession, the level of