Business Cycle by Rachel Bleich

The Business Cycle

What is the business cycle? How does it affect me? More and more, we hear about the business cycle in our ever-changing economy, but to fully understand just what we are hearing, we need to dig deeper. Once we comprehend what the business cycle is and what it does, then we can recognize the impact it has in daily life.

The business cycle, by its most common definition, is a period that extends from a peak in economic activity, through a following recession, recovery, and expansion until the next peak in economic activity is attained. The definition could also be looked at as a period extending from a trough in economic activity, through recovery, expansion, a peak, and recession until the next trough, or low point, in economic activity is reached. This cyclical movement is caused by changes in economic forces; one of the most common forces that affects business situations and the business cycle is aggregate demand, which can be looked at through the components of demand that make up the GDP. The relationship that represents aggregate demand is the sum of household expenditures (personal consumptions expenditures and residential investment), business expenditures (nonresidential investment), net exports, and government spending. All of these separate entities work together to create aggregate demand, whose fluctuations affect the macroeconomic forces that affect the business cycle, thus affecting each and every one of us.
The rise and fall in economic activity, also known as the business cycle, affects everyone in their daily life. As economic activity rises and the business cycle is expanding towards a peak, people make more money, invest more money, and feel more capable of spending more money. When the economic activity cycles towards a trough or recession, people make less money with some people losing jobs, and people feel less able to invest and spend money. How the economy is faring determines what we do with our money, which affects what we do, buy, wear, etc. This feeds into the household expenditures factor in aggregate demand, which is further proof of the relationship we have with the business cycle. When business expenditures, net exports, and government spending are thrown into the mix, it is easy to see how each part of demand works to influence the business cycle, and ultimately the average person.

The business cycle is an ever-changing rise and fall in economic activity that affects everyone, but it is also affected by everyone. It lives in a symbiotic relationship with household expenditures, business expenditures, net exports, and government spending as fluctuations occur. The important thing to remember is that no matter where the economy is in the business cycle, the cycle will continue and economic activity will change. So, although we maybe at a low point in economic activity, we will cycle into another expansion. The business cycle: it happens.