Understanding the Economic Cycle; Why is it Important?


Some of the basic economic terms we can now find in news articles are “inflation,” “exports,” “imports,” and “Gross Domestic Product (GDP).” Economics is one of the most important subjects taught in high school because it teaches us the terminology, we need to understand the Philippines’ economic status in order to think strategically and make decisions that can maximize the outcome of our everyday lives.

At its core, economics is the study of people. It aims to explain what motivates human behavior, decisions, and reactions in the face of adversity or success. Economics is a branch of study that combines politics, sociology, psychology, and history. When you study economics, you gain a toolkit of skills, approaches, and ways of thinking that you can use to solve a variety of problems. Economics is a fundamental discipline that underpins the study of business, management, and public policy.

What is an Economic Cycle?

The economic cycle, also known as the business cycle, is the fluctuating state of a market-based economy. It is the period during which the economy oscillates between expansion and recession. An economy is a set of production and consumption activities that determine how resources should be allocated. Almost every economy today is a market-based economy in which the laws of supply and demand determine prices.

Global economic conditions, trade balances, productivity, inflation rates, interest rates, and exchange rates are all examples of how supply and demand pressures affect the economy. The variables shape the economy and the state of the economic cycle as a whole.

Stages of the Economic Cycle

An economic cycle is composed of the following stages: expansion, peak, contraction, and trough. Economists assess the current economic cycle by examining factors such as interest rates, employment levels, consumer purchasing power, gross domestic product, and so on.  

Despite its being called a “cycle”, it is critical to understand that the business cycle is not regular or even cyclical. Its pattern is reminiscent of wave movement, and waves do not consistently undulate at set, periodic intervals. Some recoveries took years, while others were measured in months. Recessions, like booms, can last for years or just a few months.

1. Expansion Phase

Expansion is referred to as a growth period, When the economy is expanding, individuals invest in industries dealing with technology and capital goods. The expansion phase occurs when the economy is steadily growing, interest rates are low, production levels are high, and inflation is under pressure.

Increases in output during an economic expansion are primarily the result of increased purchases of durable goods by consumers and machinery and equipment by businesses. Consumer and business confidence drives product and service demand. As demand increases, businesses increase their inventories to ensure that they can meet new purchase orders. Above and beyond the increase in actual sales, the decision to increase inventories frequently has an additional impact on production volume.

2. Peak Phase

When economic growth reaches its peak, as the name suggest it refers to the peak stage. In the peak stage, the economy then reaches a saturation point, or peak, which marks the beginning of the second stage of the business cycle. The maximum rate of growth has been reached. The economic indicators do not continue to rise and are at their peak. Prices have reached their peak. This stage represents a turning point in the economic growth trend. At this point, consumers tend to restructure their budgets.

However, this maximum growth level causes economic imbalances or variations that must be addressed immediately. When economic growth slows, employment rates fall, and prices fall. After this point, employment and housing starts beginning to fall, ushering in a contractionary period. The trough stage occurs when the economy experiences an intense low in growth, after which the economy begins to recover.

3. Contraction Phase

One recent example of a major economic contraction was the COVID-19 pandemic. An economic contraction occurs when domestic output, such as GDP, falls. It has an adverse effect on other areas such as personal income, production, and sales. The unemployment rate is likely to rise. It is triggered by an event, such as a stock market correction or crash. The true cause, however, precedes the widely publicized event. It could be caused, for example, by an increase in interest rates, which reduces capital spending.

Investors sell stocks, driving down prices and reducing funding for large corporations. Businesses reduce spending and then lay off employees. This reduces consumer spending, resulting in additional business losses and layoffs. To comprehend this economic downturn, one must first understand the causes of the business cycle, particularly the causes of a recession.

4. Through Phase

A trough is a stage in the business cycle that marks the end of a period of declining business activity and the beginning of a period of expansion. The business cycle is the upward and downward movement of gross domestic product, which includes recessions and expansions with peaks and troughs.

Employment levels also indicate where the economy is in the business cycle. Unemployment rates of less than 5% are consistent with full employment and indicate economic growth. When the unemployment rate rises month after month, the economy has almost certainly entered a contractionary phase. When the unemployment rate reaches its lowest point, a trough has most likely occurred. Wages and income are also indicators of where the economy is in its business cycle. These rise during expansion, fall during contraction, and reach their lowest point during a trough.

Why is it Important to Understand Economic Cycle?

Every Filipino Citizen is part of the market-based economy of the Philippines. The success of a market-based economy is defined by the fact that it essentially benefits everyone by producing and consuming more goods and services over time. A growing Gross Domestic Product is an important aspect of a successful economy because it captures increased production and consumption levels.

Given that everyone is a part of the overall economy, it stands to reason that the state of the economic cycle affects everyone. It is usually in everyone’s best interest for the economy to be in an expansion phase so that more wealth can be accumulated. In other words, because the stage of an economic cycle affects every citizen in the country’s market-based economy, it is critical for them to understand the current economic cycle being experienced by the country in order to make sound business decisions. For example, you should not buy a house and pay for it with a loan during a transition period because the central bank has implemented higher interest rates that may be burdensome for you to pay in such a situation.

Economic Status of the Philippines

As the Philippines emerges from a state of emergency, preventing an economic crisis has become the government’s top priority: the country is in its first recession in three decades. From a news article, Deputy Speaker and Davao City Rep. Isidro Ungab said Filipinos must be prepared and plan how to budget their income and expenses as the country faces global inflation, skyrocketing fuel prices, looming food shortages, and a protracted Russia-Ukraine war.

However, it is critical to remember that during a “through” phase, we are given the opportunity for an expansion phase to come.