A business cycle is a naturally occurring phenomenon in a free market economy, and its effects include the expansion and contraction of a national economy. Expansion allows for more businesses to start operations, wages to increase, and supply output to meet increased consumer demand. After reaching a peak — which includes an equilibrium point between producers and consumers — an economy may begin a contraction, where it experiences negative growth. The effects of the business cycle can be wide ranging in this manner, extending from individuals to businesses to other economies.
Business cycles do not have any sort of regular timing or period of occurrence. Most free-market economies have several business cycles that tend to last from several months to several years. Economists measure these cycles and surrounding factors to determine the effects they have on all parties in the economy. It can be difficult to determine when a business cycle starts and stops at the most current moment. Therefore, economists measure historical business cycles and attempt to match the similarities to current economic conditions.
Economists measure the effects of the business cycle to first ascertain growth and expansion in a market. Full employment is common at the peak of many business cycles. At this point, economists believe that an economy can stay constant so long as no artificial interaction occurs from outside forces. Inflation should also be constant as no growth occurs, which naturally promotes inflation. Essentially, a business cycle peak indicates that all resources in an economy have an efficient use by producers.
During a contraction, the effects of the business cycle can be much wider than the growth and peak stages. As the business cycle enters a contraction phase, unemployment may increase, wages can decrease, and consumer confidence will begin to fall. Companies need to pull back on their production output in order to match reduced consumer demand. Government actions may increase as regulatory agencies often attempt to stem the negative effects, but in many cases, contractions in a business cycle are often part of destructive capitalism.
Business cycles tend to go in circles as expansion, peak, contraction, and troughs occur. Their effects, therefore, repeat at each stage. Extreme cycles can affect global economies as an especially severe downturn can affect more than one economy. Therefore, one country’s economy can force another country’s economy into a contraction period due to the strong connection between the two.