A business cycle is a term used to describe changes, which occur in the economy over a long period. Economic fluctuation is a phrase used to describe various tendencies in a business cycle. Economic fluctuation in a business cycle can be in terms of four phases, i.e., peak, recession, trough, and recovery/expansion. These phases normally occur, as shown in the figure below, which is adapted from Rapp (1).
As shown in the figure above, economies undergo a phase called recession or contraction. Contraction is the stage when the economy starts experiencing a decline, and it occurs immediately after the economy has reached its peak.
The next fluctuation or business phase is called the trough. A business is said to be in the trough phase when the revenues hit bottom. An economy hits bottom because of a tough recession. Persistent poor economic performance leads to an extreme contraction of resources resulting in to decline in economic growth. Generally, this phase is characterized by a high level of unemployment and a high level of inflation. Once the economy hits bottom, it cannot decrease beyond that point.
According to the economist, the trough phase is necessarily followed by an expansion phase. Expansion is when the economy starts growing once again after hitting bottom. The expansionary stage is characterized by an increase in GDP, employment growth, and a decrease in the level of inflation.
The expansion phase continues until the economy hits a peak. A peak phase occurs after a regular stretch of recovery, which leads to full employment of resources, and economic growth reaches the maximum level. From the peak phase, the cycle is likely to repeat itself.
Real GDP, Inflation, And Unemployment
Real Gross Domestic Product (GDP) is an inflation-adjusted measure of national income where stable prices are used in the computation of the gross domestic product (Ahuja 15). Real GDP gives an accurate measure of the national income since the inflation factor is taken into account.
Inflation- is the general increase in prices of commodities over a given period. It more often than not occurs when a country’s GDP declines relative to the amount of money in circulation. During inflation, the purchasing power of money decreases, and as time passes by the value of money decreases rapidly (Ahuja 21)
Unemployment is a condition that occurs when people remain jobless, although they are vigorously searching for one. Unemployment occurs when willing and able individuals cannot find jobs or work that satisfies their desires and matches their capability. People may remain unemployed because of a slow economic growth rate or due to inflation.
Trends of Economic factors in a business cycle
Throughout a business cycle, the economic variables assume a particular trend. During contraction and trough phases, the GDP starts declining while unemployment rates start increasing, and inflation increases. During recovery and peak phases, the GDP and prices start increasing while inflation rates start increasing slowly as the economy expands. The unemployment rates decrease as many employment opportunities are generated by an increasing economy.
Line graph showing Australia GDP, Unemployment and Inflation Rate for the years 2004-2009.
Graph showing Australian GDP, Inflation and Unemployment over time (Wayne et al 1).
Australian Economic Trend
Based on the data above, in 2004 Australia’s GDP increased from 3 percent to 3.5 percent. In 2005, the inflation rate decreased from 2.8 percent to 2.3 while the unemployment rates decreased from 6 percent to 5.1 percent. This trend indicates that the economy was recovering from a slump reaches peak in 2005. In 2006, the economy registers another slump until 2007 when it starts recovering. The recovery is gradual until the economy hits peak again in 2008 when the GDP is at 4.3 percent and inflation rate is 2.3 percent while the unemployment rate stands at 4.4 percent. As the economy approaches full employment level, the inflation rates rise and the level of unemployment starts decreasing.