Concept and components of business cycles Essay Example | Topics and Well Written Essays - 500 words

Concept and components of business cycles - Essay Example Whenever talks are made concerning the economic or business fluctuations, notions of aggregate economic income or output is anticipated. This is because, while business cycles are expressed in terms of fluctuations in GDP, there is usually an accompaniment by labor unemployment rate fluctuations too (Parkin, 2012). However, economists have often noted that there is variation in the lengths of a complete business cycle, as the duration may range from between two to twelve years, but averagely six years. Business cycles are significant in the sense that they highlight the economic relationships that exists in the economy. For instance, while growth in the economy will fall and rise with cycles, it generates a long-term trend line for growth. Economic growth above the trend line would result in a fall in the unemployment rate. Based on Okun’s Law, a 1% rise in GDP above the trend line would result in a 0.5% decline in the employment (Parkin & Bade, 2001). A business cycle is often comprised of four main stages that form its components. These are the recession (trough), contraction, recovery and expansion, and growth (peak). Even though the concept of the business cycle is used in relation to the larger economy, its phases can be applied to several sections of the business or a particular industry. The expansion and recovery phase relates to the period in which the business is rising, and consumer confidence is growing in the economy. As such, companies seize the opportunity to expand, and incomes and spending rates increase. This period is often associated with significant aggregate increase in factors such as total income, output, trade and employment rates. It persists for approximately six months, and is characterized by a widespread expansion of economic units/sectors in the economy. An extended period of this phase results in a boom in which the