The Importance Of The Business Cycle

Have you ever wanted to buy a house or a car? Have you ever gotten a job, or even lost a job? Have you ever paid for anything? These everyday actions are all affected by the business cycle, yet most people do not know what it is. By definition, the business cycle is the “fluctuation in economic activity that an economy experiences over a period of time” and is “basically defined in terms of periods of expansion or recession” (Investopedia). However, when it comes down to it, this cycle is just a simple concept applied to a confusing and perplexing system. Many people have asked themselves why the business cycle is important. Well, it is not; unless you specialize in the business field, the business cycle won’t affect you much on the micro

If you are part of the handful of Americans that are self-employed, or you own a business that is dependent on consumer spending, then you are especially vulnerable to the effects of this cycle. People and businesses that fall into this category will find that demand is closely related to movements in GDP, gross domestic product or the broadest quantitative measure of a nation's total economic activity (Investopedia). During a boom, such businesses should enjoy strong demand for their products, assuming that the products are actually wanted by consumers. But during a slump, the business has to suffer a sharp drop in demand (tutor2u). Such events may cause business owners to lose their customers, employees, their businesses, and eventually maybe personal assets such as their homes

These factors can affect the cycle for better or for worse. At times of high unemployment, factories are underutilized, causing a lower output, slowing down productivity. Productivity, specifically high productivity, has been found to have a link between low inflation. Therefore, low productivity leads to high inflation. Inflation occurs when prices of goods and services rise. Salaries and wages are weakened as a result of businesses having to spend more on necessary materials. When inflation is on the rise, people spend less, causing the economy to suffer (Banton). When people start spending less, it affects consumer confidence. High consumer confidence is when consumers spend now rather than later because they’re confident that they’ll maintain a stable salary or wage. However, when consumer confidence is low, people are deciding to spend later rather than now, since they aren’t sure what the future will hold