Different phases or stages of a typical business cycle are given below:
A typical business cycle is characterised by five different phases or stages-(1) Depression, (2) Recovery (or Revival) (3) Prosperity (or full employment), (4) Boom (or overfill employment), and (5) Recession.
1. Depression:
It is a protected period in which business activity in the country is far below the normal. It is characterized by a sharp reduction of production, mass unemployment, low employment, falling prices, falling profit, low wages, contraction of credit, a high rate of business failures and an atmosphere of all round pessimism and despair.
All construction activities come to a more or less complete standstill during a depression. The complete standstill during a depression. The consumer goods industries and however, not much affected.
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2. Recovery (or Revival):
It implies increase in business activity after the lowest point of the depression has been reached.
The entrepreneurs begin to feel that the economic situation was after all not so bad. This leads to improvement in business activity.
The industrial production picks up slowly and gradually. The volume of employment also steadily increases.
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There is a slow rise in prices accompanied by a small rise in profits. Wages also rise. New investments take place in capital goods industries.
The banks also expand credit. Pessimism is gradually replaced by an atmosphere of all round cautious hope.
3. Prosperity (or Full Employment):
This stage is characterized by increased production, high capital investment in basic industries, expansion of bank credit, high prices, high profits and full employment. There is a general feeling of optimism among businessmen and industrialists.
4. Boom (or, Overfill Employment):
The prosperity phase leads to the emergence of boom. In this stage of rapid expansion in business activity to new high marks resulting in high stocks and commodity prices, high profits and overfill employment.
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There is undue optimism among businessmen and industrialists who make additional investments in the various branches of the economy.
The number of jobs exceeds the number of workers available in the market. Such a situation is known as overfill employment.
Profits touch a new height. Businessmen further increase their investments. Runaway inflation raises its head in all its ugliness. Prices risk sky-high.
The tempo of boom reaches new heights. There is an atmosphere of over-optimism all around. But this carries with it seeds of self-destruction. Bottlenecks begin to appear in various sectors of the economy.
5. Recession:
Over-optimism is replaced now by over-pessimism characterized by fear and hesitation on the part of the businessmen.
The failure of some businesses creates panic among businessmen. The banks begin to withdraw loans from business enterprises.
More business enterprises fail. Prices collapse and confidence is rudely shaken. Building construction slow down and unemployment appears in basic, capital goods industries which gradually spread to other industries as well.
Unemployment leads to fall in income, expenditure, prices and profits. Recession has a cumulative effect. Once a recession starts, it goes on gathering momentum and finally assumes the shape of depression.