What Are the Phases of the Business Cycle?
Learn the phases of the business cycle for Cambridge International A Level Economics: expansion, peak, contraction and trough, with recovery and exam pitfalls.
The business cycle has four main phases: expansion, peak, contraction and trough. Recovery is the move out of a trough and into the next expansion. The cycle describes how an economy’s real output rises and falls over time.
Syllabus focus: This builds on Topic 4, The Macroeconomy. The phases, causes and role of automatic stabilisers are A Level content in 9.2.3, Economic growth and sustainability.
The phases
- Expansion: Real output rises. Firms generally produce more and employment tends to increase.
- Peak: Real output reaches a high point before growth slows or output begins to fall.
- Contraction: Growth slows or real output falls. A sustained fall in real output is a recession; unemployment may rise.
- Trough: Real output reaches a low point before it starts to recover.
For example, if firms receive more orders, they may increase production and hire workers during an expansion. If spending later weakens, firms may cut production, moving the economy towards contraction. Once output stops falling and begins to rise, recovery has started.
Changes in aggregate demand (total planned spending in the economy) can drive the cycle. A fall in spending may cause contraction, while stronger spending may support expansion. Supply shocks, such as a sharp rise in production costs, can also reduce output.
Automatic stabilisers help soften these changes without a new policy decision. During a contraction, tax receipts tend to fall and some benefit payments rise, supporting household spending. During an expansion, rising tax receipts can help restrain spending.
Exam mistake to avoid: A peak is a turning point, not proof that output has already fallen. Also, slower growth does not necessarily mean a recession: output may still be rising, just less quickly.
