Boom And Bust Cycle

Published Feb 3, 2023

Definition of Boom and Bust Cycle

A boom and bust cycle is a period of economic expansion followed by a period of contraction that happens repeatedly. That means it describes a situation in which an economy experiences a period of rapid growth followed by a period of decline, which is then followed by another period of growth, and so on. It is also often referred to as the business cycle and is considered to be one of the key characteristics of capitalist economies.

Example

To illustrate this, let’s look at the economy of an imaginary country called Kreisland. In the early 2000s, Kreisland’s economy was growing rapidly. Companies were investing heavily, there were more than enough jobs available, and the government earned a lot of taxes because most companies turned in profits. In other words, the economy was booming. However, after a few years, growth rates started to decline. Many markets were saturated, and companies found it increasingly hard to grow further. As a result, the economy peaked and eventually started to shrink in 2010. The following years were tough. Companies had to reduce their workforce, unemployment increased, profits decreased, and people couldn’t afford to buy as many goods and services anymore, which further accelerated the decline. The economy fell into a recession (i.e., a bust).

Why Boom and Bust Cycles Matter

Boom and bust cycles can have a significant impact on an economy. During the boom phase, an economy experiences a period of rapid growth and increased investment. This can lead to increased employment and higher wages. However, during the bust phase, an economy experiences a period of contraction and decreased investment. This can lead to decreased employment and lower wages. Thus, it is important for policymakers to be aware of the potential risks of boom and bust cycles and take steps to mitigate them.