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The business
cycle is the term for the recurring periods of expansion and contraction of
economic activity. Business cycles have an impact on inflation, spending,
employment, and other aspects of the economy. As you might guess, they
affect the performance of investments such as stocks as well.
There are essentially four periods in a business cycle.
Expansion is the period during which demand and production are increasing
and consumer confidence is on the rise—with sales on the increase as well.
Inflation and interest rates may also rise during an expansion period.
Business expansion rises to a peak, after which follows a
period of contraction, during which such factors as sales, prices,
production, and employment begin to decline. The decline is typically followed
by falling interest rates as well. If the decline is long and severe enough, the
trough in the cycle may be a recession, which is generally defined as at
least two consecutive quarters of decline in the Gross Domestic Product
(GDP).
Eventually, demand and production increase once again; this
recovery leads to a new period of expansion, and the business cycle
begins anew.
Economists track the business cycle using the Gross Domestic Product,
a figure released quarterly by the Commerce Department that combines consumer
and business purchases, investments, and exports of goods and services. A complete business cycle begins at a base line in
the GNP and continues through one rise, one decline, and a recovery back to the
baseline. The average business cycle is said to last three to five years,
although many exceptions to the rule abound, and analysts often disagree about
when the peaks and troughs of the cycle have actually occurred.
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