Factors Affecting Business Cycles Video

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  • 0:00 What Is a Business Cycle?
  • 0:56 The Four Phases of a…
  • 2:19 What Factors Affect…
  • 3:50 Lesson Summary
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Lesson Transcript
Instructor: Tonya Brewer
In this lesson we'll learn about the factors that affect the business cycle. The business cycle can be used to help predict future business and is very important in the forecasting model.

What Is a Business Cycle?

Before we begin to discuss the factors that affect business cycles, it is important to understand what a business cycle is. A business cycle can be defined as an economic sequence that is characterized by recession, recovery, growth and decline. It is the up and downs of our economy.

The economic growth is called a recovery and the decline is called a recession. During a recession, you would see lower household income, lower business profits and a higher unemployment rate. A growth would be the opposite, having increased household income, increased profits and more individuals employed.

Most individuals have experienced the ups and downs of the economy throughout their lives. Although it is not always a smooth transition, there is a pattern to these fluctuations. These patterns have been studied, and they are fairly predictable as to what will happen after certain events.

The Four Phases of a Business Cycle

The first phase in the business cycle is expansion. Expansion is a period of economic growth. Growth is characterized as higher household income, lower unemployment and higher profits for businesses. When household income is higher, consumers will purchase more goods. By purchasing more goods, businesses will start to see more profit. This is the upward trend for the economy and businesses

The next phase is called the peak. This is the height of the expansion. It's like being on a Ferris wheel. The ride to the top is the expansion, and when you reach the highest point, you're at the peak. The same applies to the business cycle. This is the highest point you will see in a particular business cycle.

The third phase of the business cycle is called the contraction. Imagine you're back on the Ferris wheel. Once you've reached the peak, you start to come back down. This is the contraction, and it's the period of economic decline. This is the opposite of the expansion. You'll see more unemployment, and fewer products being purchased and produced. If the phase lasts for six months or more, it's called a recession. If the recession is very long and very severe, then it's referred to as a depression.

The last phase is called a trough, or the lowest point of the contraction. If you're back on the Ferris wheel, you've reached the peak and have started back down toward the bottom. Once you've reached the bottom, or the lowest point, you'd be at the trough.

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