As a business person, it is important for you to know what the Economic Cycle is and how you can better take advantage of it. The more information you have about it, the better positioned you are to benefit for it. But what is the Economic Cycle?
What is the Economic Cycle
The economic cycle is the fluctuation of the economy between periods of expansion (growth) and contraction (recession). Factors such as gross domestic product (GDP), interest rates, total employment, and consumer spending, can help to determine the current stage of the economic cycle.
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How does the Economic Cycle work
The four stages of the economic cycle are also referred to as the business cycle. These four stages are expansion, peak, contraction, and trough.
From the 1950s to the present day, U.S. economic cycles have lasted about five and a half years on average. However, there is wide variation in the length of cycles, ranging from just 18 months during the peak-to-peak cycle in 1981-1982, up to the current record-long expansion that began in 2009.
This wide variation in cycle length dispels the myth that economic cycles can die of old age, or are a regular natural rhythm of activity akin to physical waves or swings of a pendulum. However, there is some debate as to what determines their length and what causes cycles to exist in the first place.
Here is a short video on how the economic cycle actually works
How Businesses are affected during a Business Cycle
When the economy starts to decline, the first companies that suffer are the ones that produce capital goods and durable consumer items, such as automobiles, computers, and appliances. Businesses generally do not have a need to increase their purchase of capital stock in a declining economy, because the equipment that they have can produce enough output to satisfy declining needs.
Likewise, consumers lose confidence in the economy, so they cut back on major purchases, such as cars and trucks, computers, and appliances, since most people replace these items when they want a newer or better version. However, in an uncertain economy, people will hold onto what they have for long periods of time.
Through the multiplier effect, the economy slows even more until it reaches a trough. However, most services and nondurable consumer goods are relatively unaffected by the recession, because it is difficult for consumers to put off such purchases, such as for food, clothing, and medical services.
Indeed, some firms actually receive increased business during a recession, such as auto repair shops and law firms specializing in bankruptcy, since the need for these services usually increases as a result of the recession.
At some point, however, the economy bottoms out because people can only put off purchases for so long. Indeed, because they have put off purchases, there is actually an acceleration of purchases as the economy recovers. For instance, people can keep their cars and trucks for a few more years, but at some point, repairs will start to get more expensive than buying a new vehicle.
Likewise, many people who were contemplating elective medical procedures can delay the procedures until a later time, but at some point, they usually have to get it done. Another factor that helps the economy to recover is that people pay down their debt, since they have reduced their spending, so they have more money when they decide to start buying again.
Another topic that is related to the economic cycle that you should be concern about is Arbitrage. Find some useful information about it here.
What is Arbitrage and how does it work
Arbitrage according to wikipedia is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices at which the unit is traded. The concept of arbitrage is extremely useful and profitable if you have a fair idea of how it works. This article will give you a basic overview of arbitrage so that you can decide whether it is right for you.
If you want to know about arbitrage and how it applies to the currency markets, then this section will answer your questions. I will also provide some useful tools you can use in the future when you decide to learn more.
If you want to trade currencies independently of any company or individual then you need to develop your own fundamental analysis. The more knowledge you have about the market and its history, the better your arbitrage strategy will be. You must be able to predict changes in the price of a specific currency.
Try to collect as much information as possible. You can get this information from books, internet forums, or even join online classes.
In order to have a comprehensive and accurate analysis of the currency markets, you need to learn all about fundamental analysis. There are many different types of fundamental analysis and if you learn one method of gathering information about the market, you will be better able to use it with your arbitrage strategy.
Fundamental analysis uses all aspects of financial data, currency prices, economic cycles, and technological innovations. It can also look at past trends using historical data.
Understanding what makes a change in the price of a currency, whether it is a rise or a fall, can give you an advantage when trading short term fluctuations. When you think about it, there is no way the large changes in currency prices will happen without some change in the market.
How does an economic cycle affect the value of a currency? Will it affect the price of the currency over a period of time?
Understanding how the economic cycles affect the market and the impact it has on the prices of currencies is essential for your arbitrage strategy. Just knowing this is important because you will not be able to accurately predict any price changes without having some kind of understanding of the financial markets.
The history of the financial markets can give you a rough idea of the next change in the value of a currency. This is because any currency has a historical foundation, which makes it impossible to predict price movements in the future.
Understanding how the economic cycle affects the price of a currency is important for you to develop your own fundamental analysis. If you do not understand the importance of such analysis, then you should consider trying to develop your own fundamental analysis.
