Expand or Contract
Expansion is the phase of the business cycle when the economy moves from a trough to a peak. It is a period when the level of business activity surges and gross domestic product (GDP) expands until it reaches a peak. A period of expansion is also known as an economic recovery.
BREAKING DOWN ‘Expansion’ An expansion is one of two basic business cycle phases; the other is contraction. The transition from expansion to contraction is a peak, and the changeover from contraction to expansion is a trough. Expansions last on average about three to four years, but they have been known to last anywhere from 12 months to more than 10 years. Much of the 1960s was a time of expansion, which lasted almost nine years. Economists and policy makers closely study business cycles. Learning about economic expansion and contraction patterns of the past can help forecast potential trends in the future. Whether cash is available or scarce, interest rates are low or high, and companies and consumers can borrow money to spend on goods and services affects how businesses and consumers react.
Contract: A contraction is a phase of the business cycle in which the economy as a whole is in decline. More specifically, contraction occurs after the business cycle peaks but before it becomes a trough. According to most economists, a contraction is said to occur when a country’s real GDP has declined for two or more consecutive quarters.
BREAKING DOWN ‘Contraction’ For most people, a contraction in the economy can be a source of economic hardship; as the economy plunges into a contraction, people start losing their jobs. While no economic contraction lasts forever, it is very difficult to assess just how long a downtrend will continue before it reverses. History has shown that a contraction can last for many years, such as during the Great Depression.
The Business Cycle Four discrete phases comprise the business cycle, and the economy moves through them in a specific order: expansion, peak, contraction and trough. During economic expansion, gross domestic product (GDP) rises, per capita income grows, unemployment declines and equity markets tend to perform well. The peak phase represents the end of an expansionary period, after which contraction takes hold. GDP and per capita income decline, unemployment ticks up and stock market indices trend downward.