Basic Economic Concepts - Business Cycle
Changes in the business cycle impact the return on securities in different asset classes. We'll discuss the business cycle's effect later in this section.
The business cycle has four phases:
- Expansion - this phase begins after a low point in the economy and is characterized by increased economic activity and real GDP increases.
- Peak - this is the period where the growth rate of the expansion slows, and the economy is in a period of prosperity.
- Contraction - this follows the peak and is characterized by a reduction in GDP, as well as other business indicators. Also known as recession.
- Recovery - this is where the contraction reaches bottom (also called a trough) and may be stagnant for a time before starting the next expansion.
Phases of the Business Cycle
The term recession may refer to the contraction stage in the business cycle, but it also refers to a prolonged drop in GDP that lasts at least two quarters.