Business Cycle Definition

In short, the business cycle is the natural rise and fall of economic growth. Businesses expand and hire more workers during periods of economic growth, while shedding employees during periods of contraction.

The business cycle is usually measured by gross domestic product (GDP) growth. GDP is the value of all final goods and services produced in an economy during a period of time, typically one year. When GDP growth is positive, the economy is expanding; when it’s negative, the economy is contracting.

There are four phases of the business cycle: expansion, peak, contraction, and trough. Expansion is characterized by rising GDP growth, increasing employment levels, and upward pressure on prices. The peak phase marks the end of expansion and the start of contraction; GDP growth slows, unemployment begins to rise, and inflationary pressures start to ease. Contraction is characterized by falling GDP growth, declining employment levels, and downward pressure on prices. The trough marks the end of contraction and the start of expansion; GDP growth picks up, unemployment starts to decline, and inflationary pressures ease.