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Business cycles relate to fluctuating growth in economies and are measured using the gross domestic product for respective countries.
Business cycles relate to fluctuating growth in economies and are measured using the gross domestic product for respective countries. A business cycle has four phases, i.e. recession, slump, growth and peak. Task 1 includes a brief look at the business cycle of the UK economy over a five year period and explains the usefulness of business cycles to business organisations that need to plan for the future.
The Business Cycle
The business cycle relates to repetitive fluctuations of expansion and recession in an economy. Over the longer term an economy would normally experience a positive growth in output. Therefore, the business cycle can be defined as the ‘short-term fluctuation of total output around its trend path’ (Begg et al, 1997, 518).
Business cycles are measured using the gross domestic product (GDP), which is the basic measure of total output of goods and services, within a time period, normally a year.
Over time, output growth alternates between being positive or negative. The four stages of the business cycle are:
- Recession – in this scenario, there is negative growth in output in the economy between a given time period. In this phase, income and unemployment, for example, are declining. A recession is said to occur when GDP has declined for two consecutive time periods, normally two consecutive quarters
- Trough/Slump – here, GDP is at its lowest point on the business cycle
- Growth/Recovery – the economy, as measured by GDP has moved away from the slump into positive growth
- Peak – this is the highest point of the business cycle
In the UK, the business cycle tends to last between 6 – 10 years, although this cannot be guaranteed. In fact, as the cycles occur at different time intervals, some economists have disputed the existence of ‘cycles’ and are more comfortable referring to the up and down movements in the economy as ‘fluctuations’ instead.
Having said that, there are enough similar patterns between cycles to warrant their relevance where studying the state of the economy is concerned.
The cycle normally follows a trough to peak pattern. The troughs/slumps are the lowest point of each recurring business cycle, for example, as seen in 1992 and 2002, the latter being the most recent low point seen in the UK economy. It is worth pointing out that a slump does not indicate negative growth.
Peak periods are the highest points of each cycle after periods of growth in the economy. For example, after the 1992 recession there followed a period of growth culminating in a peak in 1994.
It is believed that business cycles can be manipulated by politicians. The political business cycle theory infers that politicians normally adopt policies that reduce inflation to gain credence from their voting public upon assuming office and adopt expansionary policy in the run-up to elections to achieve favourable consideration from voters.
An understanding of the business cycle by business organisations could be the difference between them achieving competitive advantage and enduring adverse business performance.
By understanding the business cycle, business organisations are able to incorporate this into their decision making processes through:
- Identifying and forecasting economic activity outside respective organisations
- Identifying opportunities and threats facing these organisations, relating to the business cycle
- Putting in place policies and strategies to either exploit the opportunities or reduce the threats. For example, a business organisation might postpone the purchase of an asset, due to its high cost until a time in the future, when it can make a better return on that asset through its utilisation
- Planning and allocating resources
For example, if past business cycle patterns and the expert analysis of economists point to a period of economic growth in the next period, a business organisation will expect customers to demand more of their products and consequently, put in place marketing and business strategies aimed at producing more goods and services, while at the same time maximising their profitability.
Business cycles are measured using GDP. There have been two major recessions in the UK. Business cycles are relevant to business organisations that use the information to predict future performance with the intention of achieving competitive advantage.