The term “economy” traditionally refers to consumption and production of goods in a specific region or country. Over the past several years, we have heard more and more about the U.S. economy, and its impact on countries across the globe. While many countries today are plagued by economic recession, others are experiencing significant financial expansion. Countries which hope to further promote expansion are often encouraged to study economic cycle trends. Many financial experts agree that understanding the economic cycle is essential to ensuring financial health and stability.
Before one can learn from the economic cycle, he must understand its purpose. Business cycles are a specific type of economic model used to identify long-term changes in economic growth, and are traditionally based on changes in real gross domestic product. Like many cycles, business cycles can last from a few months to several decades. Despite being classified as a “cycle,” these changes do not, in reality, follow a set of regulations in regards to frequency, length, or severity, and instead may vary quite dramatically.
While there are a number of recognized economic cycles, the Schumpeter model is one of the most popular. This model, which was first created by Joseph Schumpeter in the mid-20th century, suggests that the economic cycle is broken into four distinct stages. In the first stage, rapid expansion through high production, prices, and low interest rates is abundant. This expansion is often followed by a period of crisis, in which firm bankruptcies and stock market crashes are common. After economic crisis, recessions often occur, which traditionally are characterized by low production and prices, high interest rates, and general financial and political unrest. Economic recovery, the fourth stage of the economic cycle, brings improvement in the stock market, and gradual increases in personal incomes.
In general terms, a recession is identified as a period of time in which economic activity is slow or stagnant. Recessions are also often classified as times in which investment spending, employment, income, business profit, and inflation fall significantly, while unemployment and financial bankruptcies rise dramatically. In contrast, economic expansions, or booms, are identified as periods in which there is a large supply of goods and services available for purchase by the public. Increases in resource utilization, job growth, and improvements in gross domestic product are also common characteristics of periods of economic expansion. It is important to note that expansions and recessions can often last for years, and may not have a clearly identified start or end point. Instead, these periods are often classified as being unpredictable and varied.
While the current economic recession is serious, it is not the first—nor will it be the last—to afflict countries around the world. Most early recessions occurred during periods of wartime, such as the one which occurred during the Napoleonic War. Other commonly recognized periods of recession include the Post-Napoleonic Depression, which occurred in the United Kingdom from 1815 to 1830, the Great Depression, which occurred in the United States from 1929 to 1939, and the late-2000s Recession, which is still affecting many individuals around the world. These periods not only featured high unemployment rates, but also limited production and low economic development. In contrast, the Golden Age of Capitalism, which predominated in the United States from 1945 to the 1970s, was characterized by rapid growth in both public and private sectors. Rapid job availability, low unemployment, and improvements in technology, ecology, and education led to significant changes for many Americans.
Obviously, the economic cycle plays an important role in the world of business and finance. While most individuals hope to avoid periods of financial decline, history shows that this is not always possible. Recession—and crisis—is not only feasible, but likely inevitable. By studying classic economic cycles, however, financial experts can better understand how to work past periods of recession and economic instability, towards greater financial growth and profitability.
For more information on the economic cycle and its effects, please visit the following websites:
- Money, Bank, Credit, and Economic Cycles
- US Business Cycle Expansions and Contractions
- The Economic Cycle and Teacher Supply
- The Business Cycle, Aggregate Demand and Aggregate Supply
- The Concise Encyclopedia of Economics: Business Cycles
- Global Business Cycle Indicators
- Identifying a Recession
- Real Business Cycle Models: Past, Present, and Future
- What’s Real About the Business Cycle?
- Understanding Real Business Cycles
- Housing is the Business Cycle
- What is a Recession?
- Economic Cycle Research Institute
- Noisy Business Cycles
- Monetary Cycles, Financial Cycles, and the Business Cycles