An economic expansion is a period of growth throughout an economy. Because productivity is increasing, it is generally represented on a curve as an upward movement. The expansion phase is also known as the economic recovery phase because it occurs after the economy has contracted for a long period.
What Is the Business Cycle?
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The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle is a useful tool for analyzing the economy and can help you make better financial decisions.
The business cycle is the natural rise and fall of economic growth that occurs over time. The cycle is a useful tool for analyzing the economy and business performance.
Definition and Example of the Business Cycle
The business cycle is a term used by economists to describe the increase and decrease in economic activity over time. The economy is all activities that produce, trade, and consume goods and services within the U.S.—such as businesses, employees, and consumers. Thus, the measured amount of productivity is what the business cycle refers to.
When businesses are increasing production, they need more employees. As a result, more people are hired, there is more money to spend, and businesses make more profits and can focus on growth. The rate at which production and consumption change positively is called "economic expansion." It continues until circumstances occur that cause production to slow.
If business production slows, not as many employees are needed. As a result, consumers have less spending money, and businesses reduce spending on growth. The rate at which production and consumption as a whole change negatively is called "economic contraction."
Corporate Funding Life Cycle
In the funding life cycle, the five stages remain the same but are placed on the horizontal axis. Across the vertical axis is the level of risk in the business; this includes the level of risk of lending money or providing capital to the business.
While the business life cycle contains sales, profit, and cash as financial metrics, the funding life cycle consists of sales, business risk, and debt funding as key financial indicators. The business risk cycle is inverse to the sales and debt funding cycle.
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Phase One: Launch
At launch, when sales are the lowest, business risk is the highest. During this phase, it is impossible for a company to finance debt due to its unproven business model and uncertain ability to repay debt. As sales begin to increase slowly, the corporations’ ability to finance debt also increases.
Phase Two: Growth
As companies experience booming sales growth, business risks decrease, while their ability to raise debt increases. During the growth phase, companies start seeing a profit and positive cash flow, which evidences their ability to repay debt.
The corporations’ products or services have been proven to provide value in the marketplace. Companies at the growth stage seek more and more capital as they wish to expand their market reach and diversify their businesses.
Phase Three: Shake-out
During the shake-out phase, sales peak. The industry experiences steep growth, leading to fierce competition in the marketplace. However, as sales peak, the debt financing life cycle increases exponentially. Companies prove their successful positioning in the market, exhibiting their ability to repay debt. Business risk continues to decline.
5 Phases of a Business Cycle (With Diagram)
The fluctuations are compared with ebb and flow. The upward and downward fluctuations in the cumulative economic magnitudes of a country show variations in different economic activities in terms of production, investment, employment, credits, prices, and wages. Such changes represent different phases of business cycles.
There are basically two important phases in a business cycle that are prosperity and depression. The other phases that are expansion, peak, trough and recovery are intermediary phases.
As shown in Figure-2, the steady growth line represents the growth of economy when there are no business cycles. On the other hand, the line of cycle shows the business cycles that move up and down the steady growth line. The different phases of a business cycle (as shown in Figure-2) are explained below.
The line of cycle that moves above the steady growth line represents the expansion phase of a business cycle. In the expansion phase, there is an increase in various economic factors, such as production, employment, output, wages, profits, demand and supply of products, and sales.
In addition, in the expansion phase, the prices of factor of production and output increases simultaneously. In this phase, debtors are generally in good financial condition to repay their debts; therefore, creditors lend money at higher interest rates. This leads to an increase in the flow of money.
In expansion phase, due to increase in investment opportunities, idle funds of organizations or individuals are utilized for various investment purposes. Therefore, in such a case, the cash inflow and outflow of businesses are equal. This expansion continues till the economic conditions are favorable.
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