Business Cycle Basics: Why Economies Boom and Bust

Over the last few years, we’ve all heard lots of talk about a looming recession. And if you like macro economics, it’s second nature to know and understand what a recession is. But a large majority of people likely have no idea what a recession really is let alone understand what causes them and what remedies can be tried to get a nation out of a recession.

Photo by D koi on Unsplash

So why do economies seem to soar one year and crash the next? And why does the business cycle matter? Let’s start by looking at what the business cycle is comprised of.

Like any cycle, the business cycle is driven by a series of events that can either lead to the boom or the bust. So what causes these cycles, and why should we care? What impact do they really have on a nation’s economy?

Let’s start by taking a look at the 4 elements of the business cycle. In short, they are: expansion, peak, recession and recovery.

Expansion:

Economic expansion is the phase of the business cycle where the economy grows and overall economic activity increases.

GDP rises — businesses produce more goods and services.

Employment increases — more jobs are created, unemployment falls.