Updated Jun 26, 2020Definition
Often irregular and mostly unpredictable fluctuations (i.e. expansions or recessions) in economic activity experienced in an economy over a certain period of time.
Example
As the economy expands, unemployment decreases while income and as spending increase. Once the expansion reaches its maximum, productivity starts to decline which results in higher unemployment, lower income, and lower spending. The economy falls into a recession.
However after some time, the productivity will slowly rise again, which will lead to lower unemployment and rising income again. Hence, the next business cycle begins.
Relevance
Knowledge about the different states of an economy and their timing is a crucial aspect for governments and other policy makers. By analyzing historical patterns of economic activity, the possible effects of government interventions can be assessed more precisely and future economic developments can be predicted more reliably.
