Economic Cycle

An economic cycle measures an economy's performance over time. It has four notable periods before the cycle renews: expansion, peak, recession, and trough.

During the expansion period of an economic cycle, GDP rises while unemployment decreases, typically due to increasing consumer spending, which causes an increase in demand that spurs companies to increase production. During the peak period, this expansion starts to slow as GDP starts to shift downward, marking the next part of the cycle, recession. In a recession, consumer spending slows, causing GDP to decrease. In response, companies slow down production to prevent overproduction due to lower demand and may have to lay off workers as a result, which increases unemployment.

Federal governments and centralized banks can help an economy recover from a recession. Interest rates may be cut to convince consumers to increase their spending, thereby raising GDP and possibly creating a new expansion period. The period just prior to expansion, when the economy is at its lowest, is known as the trough.