The economic cycle

The economic cycle explains the various fluctuations that occur in the economy between
various periods of contraction commonly referred to as recession and expansion which is
commonly referred

to as growing (Bianchi & Melosi 2017). The 4 phases of the economic cycle

get established on the basis of factors such as interest rates, consumer spending, GDP, and total
levels of employment and unemployment. The cycle makes it possible for analysts to understand
what stage the economy is in and know how to act towards the effects of that specific stage. The
economic cycle has four main stages which begin from expansion, peak, contraction, and trough.
The economic cycle considers numerous factors before deciding on what level the economy is
and develops policies towards correcting any challenges that may exist therein (Eaton et al.
2016). Therefore, one cannot assume that it makes very simplistic assumptions because there are
many considerations that must be in place before one can decide the position of the economy at
the moment. In addition, it follows a very simple method which makes it very easy for one to
read the various changes that occur in the market and this makes decision making very easy
(Bianchi & Melosi 2017). It is also much easier to notice imbalances in the market and make
appropriate decisions towards correcting such imbalances in the most appropriate manner.
Interpreting business cycles is a very complex process that considers a myriad of factors and the
economic cycle does not majorly reflect these. It only states whether the economy is performing
well or not (Eaton et al. 2016). It does not delve deeper into explaining why such a reflection is
justified. It may to some extent be misleading because it does not fully reveal the factors that
cause the economy to behave in a particular manner. This is a major limitation on the operations
of the economy as a whole and its success.

ECONOMIC CYCLE 3

References

Eaton, J., Kortum, S., Neiman, B., & Romalis, J. (2016). Trade and the global recession.
American Economic Review, 106(11), 3401-38.
Bianchi, F., & Melosi, L. (2017). Escaping the great recession. American Economic Review,
107(4), 1030-58.