Economies do not grow smoothly. Over the years output rises and falls in a repeating pattern called the business cycle (or economic cycle).
Why this matters Knowing which phase an economy is in helps governments, businesses and families plan. In a boom firms expand and hire; in a recession they may cut back. Recognising the pattern helps everyone make wiser decisions.
The four phases
- Boom — output and demand are high and rising, unemployment is low, and prices tend to rise (inflation may become a problem).
- Downturn — growth slows, demand starts to fall, firms sell less and may stop hiring.
- Recession — real GDP falls for a sustained period; unemployment rises and confidence is low. A common rule of thumb defines a recession as two quarters in a row of falling real GDP.
- Recovery — output begins to rise again, demand improves, and firms slowly start hiring once more.
What changes across the cycle
As the economy moves from boom to recession, three things typically change together:
| Phase | Output | Unemployment |
|---|---|---|
| Boom | High | Low |
| Recession | Falling | Rising |
Why cycles happen
Cycles are driven partly by confidence. When households and firms feel optimistic, they spend and invest, pushing the economy up. When they turn cautious, spending falls and the economy slows. Governments try to smooth the cycle so booms do not overheat and recessions are not too deep.
Common exam mistake: believing a recession simply means output is growing slowly. A recession specifically means real GDP is FALLING (commonly, for two consecutive quarters) - slower but still positive growth is a slowdown, not a recession.
Exam technique: when describing a phase of the business cycle, mention what happens to THREE things together - output, unemployment and prices - a complete answer links all three rather than describing output alone.
Put these stages of the business cycle in order:
- Boom - output high, unemployment low, prices rising
- Downturn - growth slows, demand starts to fall
- Recession - real GDP falls, unemployment rises
- Recovery - output begins to rise again