When demand starts rising, production increases and this causes an increase in investment. Expansion The expansion or growth stage of the business cycle is marked by a strong economy. These businesses can then use this increase in income to buy more supplies and expand even further. The phase of depression also called slump is characterized by low economic activities, rapid decline in general output and employment. This article presents three of the most frequently used definitions for the term.
Orders are cancelled and people start losing their jobs. An expansion is the period from a trough to a peak, and a recession as the period from a peak to a trough. When people make less money, they also pay less money in income taxes. It is the negative saturation point for an economy. Depression Phase When there is a continuous decrease of output, income, employment, prices and profits, there is a fall in the standard of living and depression sets in. Company Decline and Demise occur faster during economic recession and depression. You could move some assets into bonds or cash, but keep some in stocks.
It is one of the forces that shape the competitive landscape of an industry and helps determine its attractiveness. There have been recessions which were only few months to a number of years in duration. Local businesses should be encouraged by the government to compensate for unemployment thru extending credit to them. Recovery Phase The turning point from depression to expansion is termed as Recovery or Revival Phase. However, according to Hawtrey, the expansion process must end. Thus, swings in agricultural output spread throughout the economy.
Employment also begins to rise and due to the accumulated cash balances with the bankers, lending also shows positive signals. A decreasing unemployment rate leads to an increase in consumer confidence and spending, and the economy begins expanding again. Generally, producers are unaware of decrease in the demand of products and they continue to produce goods and services. Prosperity The prosperity stage typically follows the expansion stage. Prosperity or Full Employment 4.
It is essential that you start to come into your role as head of the company in this stage. Building construction slows down and unemployment appears in basic capital expenditures. Firms lose their Competitive Advantage A competitive advantage is an attribute that allows a company to outperform its competitors. Those who are not working by choice are not counted. Prescott, who are associated with the Chicago School of Economics, challenge the Keynesian theories.
However, the extent to which they are either causes or results is less well known. However, it does not offer a valid explanation as to why changes in investment take place quite often. In this phase, debtors are generally in good financial condition to repay their debts; therefore, creditors lend money at higher interest rates. A business cycle starts from trough or low point, passes trough a recovery and prosperity phase, rises to peak, declines through a recession and depression phases and again reaches a trough. Thus, home prices started to increase. Then the next stage of business cycle called depression starts.
The agriculturists are hit more than the manufacturing classes. The prosperity phase of the business cycle does not end up with a stable state of full employment; it leads to the emergence of boom. Businesses focus on marketing to their target consumer segments by advertising their comparative advantages and value propositions. Stimulative fiscal policy involves higher government spending in an attempt to stimulate the economy. Fiscal policy thus is the only option left available to actually rectify the situation; basically all you are doing is spending money through the government thus creating demand in the economy.
According to Hawtrey, the competition between capital goods and consumer goods industries for scarce resources causes their prices to rise which in turn push up the prices of goods and services. This committee reviews several economic indicators, including employment, real income, retail sales, and other factors. Another important feature of business cycles is profits fluctuate more than any other type of income. The outstanding orders for raw materials are cancelled. This leads to reversal of the process of business cycle. A reduction in short-term interest rates also encourages more investment by reducing the cost of borrowing. As a result, individuals and organizations start developing a positive attitude toward the various economic factors, such as investment, employment, and production.
To reduce the rate of interest on the national debt does help to reduce the budget deficit for the next year, but it is not very effective and will not solve the problem at anything like the speed needed. Remember that no single indicator should be viewed in a vacuum and you should always look deeper than the headlines. When the contraction gathers momentum, we have a depression. By studying the historical patterns of economic expansion and contraction, it may be possible to understand and forecast future economic trends. Although called by varying names, the four phases are often referred to as expansion, prosperity, contraction and recession.