The business cycle is the recurring pattern of expansion and contraction in a nation’s economic activity over time, typically measured by real GDP. It moves through four phases: expansion, peak, contraction, and trough. Each full cycle runs from one trough to the next, fluctuating around a long-term growth trend.<\/p>\n
In simple terms, the business cycle means the economy does not grow in a straight line. It speeds up, slows down, shrinks, and recovers in repeating waves. When people ask what business cycle theory is, they are really asking how and why economies swing between periods of growth and decline.<\/p>\n
A business cycle works as a continuous loop that repeats over months and years. The economy expands until it reaches a high point, contracts until it hits a low point, then begins expanding again. The peak and trough are the turning points that separate growth from decline.<\/p>\n
In the United States, the National Bureau of Economic Research (NBER) is the widely accepted authority that officially dates these peaks and troughs. In its framework, the economy is always in either an expansion or a recession. Cycles are recurring but not fixed in length: using NBER postwar U.S. data, expansions have averaged roughly 64 months while contractions averaged about 10 months, though the duration of any single cycle varies enormously.<\/p>\n