Macroeconomics: what are the four phases of the business cycle? What are their respective characteristics?

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The four phases of the business cycle are prosperity, recession, depression, and recovery. Both business decisions and consumer buying patterns differ at each stage of the business cycle. Most economists believe that society is capable of preventing future depressions through effective economic policies. Thus, a recession would be followed by an economic recovery.

In prospersity, unemployment remains low, strong consumer confidence about the future leads to record purchases, and businesses expand to take advantage of marketplace opportunties. The decade-long run of economic prosperity in the U.S. from the early 1990s to 2001 was one of the longest in a century.

During a recession--a cyclical economic contraction that lasts for six months or longer--consumers frequently postpone major purchases and shift buying patterns toward basic, functional products carrying low prices. Businesses mirror these changes in the marketplace by slowing production, postponing expansion plans, reducing inventories, and often cutting the size of their workforce.

Should the economic slowdown continue in a downward spiral over an extended period of time, the economy falls into depression. Many Americans grew up hearing stories from their great-grandparents who lived through the Great Depression of the 1930s. However, some companies can actually manage to prosper during poor economic times. Businesswoman Maria de Lourdes Sobrino, founder of Lulu's Dessert, has survived three recessions and continues to remain optimistic about the future.

In the recovery stage, the economy emerges from recession and consumer spending picks up steam. Even through business often continue to rely on part time and other temporary workers during the early stages of a recovery, unemployment begins to decline, as business activity accelerates and firms seek additional workers to meet growing production demands. Gradually, the concerns of recession begin to disappear, and consumers start purchasing more discretionary items such as vacations and new computer equipment. It is important to note that recovery doesn't necessarily take place at a steady pace.

Economists observe several indicators to measure and evaluate how successfully an economic system provides both stability and growth. These variables include productivity as measured by GDP, rate of inflation or deflation and employment levels.

Source(s):

I am taking an Introduction to Business (BUS 101) class at Grand Valley State University. I used the context from the Contemporary Business 2006 textbook to write this description. Hope this helps you!

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