Business cycles are mathematical expressions used to identify the process through which economies develop into a state of dynamic equilibrium. These cycle states can be categorized according to duration, business cycles, and business cycle structure. The term ‘business cycle’ itself is also used in different contexts. For instance, it is used in economics and engineering to describe a process by which resources are converted from one form to another. In political science, business cycle is used to describe the political system.
Business cycles are basically periods of economic expansion followed by a contraction in economic activity. They also have implications for public sector finances, the stability of the overall economy, and for individual households, businesses, and financial institutions. For instance, during expansion phases in any economy, public debt and deficits are usually balanced by public spending on infrastructure, creating new businesses, and increasing productivity.
But after an expansion phase, once the economy enters a state of either general inflation or deflation (a condition characterized by falling prices) prices fall sharply and become stagnant or fall further. At this point, a second business cycle begins. During this period, demand from businesses for raw materials, labor, and technology falls sharply as companies begin to downsize and/or sell off their acquired assets. As the contraction phase continues, businesses become more cautious about investing in equipment, resulting in slower growth and rising unemployment.