Economic Cycle
Candlefocus EditorThe main stages of the economic cycle are expansion, peak, contraction, and trough. During the expansion phase, economic indicators such as gross domestic product (GDP), employment levels, consumer spending, and prices tend to increase. This stage of the cycle typically lasts for several years, until the economy reaches its peak. After the peak, a contraction phase begins, and these economic indicators start to decline. This ultimately leads to an economic trough, which is when the economy experiences a low point before beginning the next expansion.
Investors use information gained from economic cycles to determine which sectors to invest in and when to make their investments. This is done by examining economic indicators to assess the current stage of the economic cycle and looking for changes in buying and selling trends. By observing economic cycles, businesses can prepare more effectively for downturns and take advantage of opportunities during periods of growth.
The exact source of economic cycles are debated among the different schools of economics. According to the Austrian School of Economics, economic cycles originate from government interference, such as central bank policies. The Keynesian Theory claims that cycles are due to the shortcomings of the markets, caused by investments, savings, and consumer spending. Finally, monetarists believe that changes in money supply drive the economic cycle.
Regardless of the cause, economic cycles are an integral part of the overall economy as some areas and sectors tend to lag compared to others. Businesses and investors can benefit from gaining insight into the economic cycle, as it allows them to be proactive in anticipating and capitalizing on ups and downs in the economy.