The Business Cycle (26.1)

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Chapter 26, Economic Issues

Learning Objective: To understand the business cycle and its effects on businesses

A country's economy goes through a cycle of prosperity and hardships overtime. Business acitivity is the main lead in this so called Business Cycle:

But what really do these stages mean? And what are the impacts on businesses?

As you can see, there are changes to many economic indicators during the ups and downs of the Business Cycle:

Inflation;
Employment;
Economic Growth.

Let's dive in each of them individually, starting from 1) inflation:

Inflation is: the overall increase in prices of goods, services, and labor in an economy.

High inflation leads to people not being able to afford local goods (increase in cheaper imports), negatively impacting local business sales;

As prices of goods and services increase, production costs are also higher making it unlike for businesses to grow/reinvest.

On the other hand...

A low inflation allows for better standard of living (ability to purchase more goods and services);

Business sales/revenues are positive, allowing for investments;

Costs of materials and energy is lower, keeping production costs low.

It is part of government objectives to keep inflation low!

The changes in the 2) levels of employment through the business cycle will also impact business activity.

When unemployment is high:

Businesses sales are lower;
Cost of labour is lower;

When unemployment is low:

Sales are higher as people can afford more goods and services;
Labor is more costly as it is harder to find;
Automation is more likely, leading to increased efficiency.

It is part of government objectives to keep unemployment rates low!

Finally, business activity is also heavily impacted by 3) economic growth, a concept that is closely related to that of GDP:

The more GDP produced, the higher the economic growth: that means more business activity, more income, and better standard of living.