Business cycles: phases, indicators, measures, economic evolution, outlooks - Essay Example

Expansion and contraction are the fundamental phases of a business cycle. Under expansion, the real GDP surges and attains a peak. Once the peak is reached, setting out for contraction, the real GDP declines until it arrives at a trough where expansion starts all over again. Prices of commodities, including labor and production costs, rise at a faster rate during expansion. After reaching the expansion peak, labor cost is likely to decline, putting off some pressure on the rising prices. While the inflation rate is inclined to a cycle which casts a gloom on the business cycle, the inflation itself tends to remain as a constant (Knoop, 2004).

A business cycle completes its course after its cycling above and below the trend level and the level of output goes back to the trend level. A recession is primarily characterized by a significant decrease in consumer consumption and buying confidence. It also affects the confidence of investors to pour more money on investments. Since individuals are shrouded by pessimism concerning their future, recession crowds out business and the demand for investment declines (Knoop, 2004). During recession, output growth and employment level decline as well.

Although, the level of prices does not slump readily, it will possibly drop under a prolonged recession. Further, the loss of the production sector becomes the cost of unemployment, leading to a greater economic gap between the rich and the poor and elevation of human misery. Although the United States has set a long period of economic upsurge early in year 2000, the intrinsic economic forces that direct business cycles were still at work (The Economist, 1999). These forces were probably shrouded by the unusual convergence of economic activities that time.

In fact, the emergence of the recent financial crisis proved that the business cycle has never died. In the cycle, times of less macroeconomic volatility often lead to