Question

1. What are the four phases of the business cycle? How long do business cycles last? Why does the business cycle affect output and employment more severely in durable goods industries than in nondurable goods industries?

Answer 1

The business cycle can be analyzed as having the follow four phases:

i) Prosperity Phase: Expansion, boom or upswing of the economy (new high)

ii) Recession Phase: from Prosperity to Depression (good things don't last forever, things start taking a turn for the worse)

iii) Depression Phase: Contraction or downswing of the economy (pit bottom)

iv) Recovery phase: from Depression to Prosperity (once pit bottom is reached the only direction is up)

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Recessions don't happen at fixed intervals in that way; in part because governments are doing everything in their power to prevent the crisis of faith that triggers an economy-wide and persistent recession.

And thus the exact time of onset of a future recession isn't accurately predictable. There isn’t a defined length determined by some “law.”

In this way recessions can be compared to earthquakes in California. It's reasonable though not foolproof to predict that one won't happen soon if one just happened 6 months ago - you could go years without one, or you could have more than one in close succession on exceptionally rare incidences.

But just because one hasn't happened for 10 years doesn't necessarily mean that one will happen next year. And so instead of being a true cycle - like ocean tides - it's really a random process. Essentially random jolts push us into or out of "boom" or "bust" phases and cannot be predicted accurately.

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This is because non-durables like food, clothes, toothpaste are everyday essentials needed just for sustenance. On the other hand, durables like a car or a new TV set aren't essential in that sense. When people are short on disposable income, they'll cut out on the non-essentials and save the money instead - especially if there's significant uncertainty about future stream of income also. But they'll keep paying for many non-durables, because many non-durables are necessary just to live.

And the non-durables which have to be bought, typical cost saving strategies will be adoped - like fixer-upping and/or buying second-hand.

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