What Is a Business Cycle Peak?
A business cycle peak is typically the top stage of a standard free-market economy. It represents the maximum amount of production output that typically meets the demand of all consumers in the market. Competition is fairly level as no new entrants can enter the market and earn enough profits to survive. A business cycle peak may also be a lead indicator that potentially signals an upcoming contraction period. After the contraction, trough and recovery periods of a new business cycle come into play, and the peak occurs again.
Free-market economies are typically those most susceptible to business cycles. The free market tends to have little or no government interaction, so the invisible hand theory takes place. The invisible hand is a naturally occurring phenomenon that allows for the distribution of resources without a single control point. That is why growth and peaks occur so often in an economy. As one sector — or market — of the economy nears its peak, another sector or market will often open, allowing companies to enter this market to provide new profits.
As mentioned previously, economies can have aggregate business cycle peaks and individual market peaks. Companies must be able to define which sectors or markets are nearing the growth stage. Sectors or markets in a current business cycle peak are often unable to generate higher profits due to high levels of competition. Too many companies in a single sector or market drive companies to look for other profit opportunities. Therefore, the peak is a determining factor for making changes in a business.
Governments — even in free markets — can also have a role in a business cycle peak. For example, governments often need resources or goods to run their agencies. These resources and goods can come from private sector companies. Once the government taps out its capital and has no need for the private sector resources or goods, the demand shifts for these items. Governments may also tax or regulate certain sectors and markets heavier than others, leading companies to leave the individual sector or market and resulting in a contraction.
Multinational companies have more issues to deal with in terms of economic factors and business cycle peaks. These companies must be able to measure and define the peak for each economy in which they operate. Companies that fail to exit a market at the end of a peak period may be subject to tougher economic markets. Creating a drag from one economy can result in companies losing money even in other profitable economies.
If economists realize what's going on, only when the economy or when a sector is in a business cycle peak, it's probably too late to do anything about it. It takes time for policy changes to take effect. By the time they do, the economy will probably be shrinking. It's actually not so bad for different sectors to be experiencing peaks at different times. It relieves some competition and allows different industries to grow. I might be wrong though.
@SarahGen-- I'm not an economist. Do we have any economists here who would like to answer?
I think that contraction will occur if precautions aren't taken. Whether an economic downturn is avoidable or not is a difficult question. That depends on how the economy is doing. It also depends on the global economy.
But there are some things that the Central Bank and the government could do while the economy is still growing to try and prevent a contraction. For example, the Central Bank could raise interest rates to slow down the economy.
If an economy is at a business cycle peak, is it for sure that it will contract afterward? Can anything be done to prevent contraction or is it unavoidable?
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