Chapter 27, Problem 1DQ

To determine

The four phases of a business cycle.

Explanation of Solution

The business cycle is the inherent cycle of changes in the market economy. The market economy moves through different phases of employment and growth and they work as a cycle. The changes are the alternative rises and falls in the level of economic activities. The main four phases of the business cycle are Peak, Recession, Trough and Recovery.

Peak: It is the highest point in the business cycle. The growth as well as the gross domestic product of the country or the economy is at its maximum attainable point and the economy is well settled at this portion of the temporary maximum. The employment is almost equal to the full employment and the level of output of the economy is closer to its full capacity. As a result of these changes, the price level in the economy rises during this phase of the business cycle.

Recession: It is the immediate phase in the business cycle which follows the peak phase. As a result of the higher levels of employment, output and the rise in the price level of the economy, there are market floods with goods and it leads to the decline in the output, employment and total output of the economy. As a result of the contraction of business in many firms, there is a sharp fall in the employment rate, total output as well as in the income of the economy. Thus, the economy moves from its maximum point to its minimum point during the recession.

Trough: This is the third phase of the business cycle. It is the lowest point of the economy where, the employment rate as well as the output is at their minimum points. The economy faces higher levels of unemployment as well as lowest levels of the gross domestic product.

Expansion: It is the phase which follows the phase of Trough. It is the phase of economic expansion which leads to the increase in the employment as well as the output of the economy, which increases the gross domestic product of the economy. It is the movement of the economy from the trough towards the peak.

The period of a business cycle varies according to the cause of the business cycle. Some may complete in the short period of 2 years, whereas some may end up in only long period above 10 years or so on. The longest known business cycle period is 15 years.

The consumer durables are the goods that can be stored for a long period without damages. They include the furniture and other household items such as appliances. Whereas the non durables are the goods that cannot be stored for a long period of time. They will be perishable and they have to be consumed once they are produced. They include the food products.

Since the consumer durables last long, the consumers can wait for the recession to complete and this helps them to consume in the future period. The higher cost of consumer durables leads to the higher spending of money and it is not advised in the period of recession. As a result of this, the producers face a large decline in the output of the consumer durables during the period of recession. The food is an important element for the livelihood and thus, the people cannot postpone the purchase of such nondurable products and they have to be purchased and consumed even during the period of recession. Thus, the output of the consumer nondurables does not fall highly even during the recession period. So, it shows that the consumer durables face a large decline in the output, whereas the nondurables face only a slight decline in the output.

Economics Concept Introduction

Concept introduction:

Business cycle: The business cycles are the alternating rises and declines in the level of economic activity over many years. Thus, the business cycles are the rises and falls in the gross domestic product of the country of its economic growth over time.