Business cycles refer to the upward and downward movement of the economy. Real GDP and unemployment levels are used as indicators to assess in which phase of business cycles the economy is. Business cycles have four phases. They are peak, recession, trough, and recovery stage.

Peak

The peak stage is characterised by high real output, low unemployment and high inflation. Domestic output is usually at optimum capacity.

Recession

The recession stage sees a contraction of output as a result of lower demand. Unemployment rates also increase but inflation rates fall. If a downward trend persists prices start falling leading to deflation. If this trend continues for two or more quarters it is then officially a recessionary phase.

Trough

A prolonged recessionary phase is called a trough in the business cycle. Here real GDP reaches the lowest point, with low output and high unemployment.

Recovery

The economy at some point, with government intervention (raising demand through infrastructure projects for example) or other factors starts showing an increase in demand and there is a fall in unemployment rates. This phase is called a recovery phase.