When an economic boom occurs, you will see the economy grows at a rapid rate. It is the final phase of expansion, before heading for the peak.
For policymakers, this phase is an alarm for them. A boom can lead to an overheated economy with uncontrolled inflation.
For businesses, this phase is profitable. Strong consumer demand. They are optimistic about their income and work. Therefore, they spend more money on goods and services.
What is booming and the economic cycle, I will write it briefly.
About the economic cycle
An economic cycle is a fluctuation in economic growth around its long-term growth trend. You may also call it the business cycle.
The cycle involves four phases, which are in sequence:
- Trough – the lowest point of the cycle
- Expansion – positive growth
- Peak – the highest point of the cycle
- Contraction – negative growth
How to determine each phase? The indicator you need to look at is real GDP growth. The statistic reflects the growth of output in the economy from period to period. Many of us use it to measure economic growth.
In the expansion phase, real GDP grew positively. Conversely, in the contraction phase, real GDP growth is in negative territory. If a contraction lasts two quarters in a row, we call it a recession. And, severe recession (for years), we call depression.
Then where is the boom? You need to know two of the other terms:
- Economic recovery – the initial phase after the trough and towards expansion
- Economic boom – the last stage of expansion and nearing the peak
Characteristics of an economic boom
In general, the economic boom is positive for indicators such as:
- Business production and economic output
- Consumer spending and aggregate demand
- Household income
- Unemployment rate
- Tax revenue
But, this phase also raises concerns about:
- Increased imports
- Surge in wages
- Inflationary pressures
Economic output grew strongly
Economic activity increases both production and consumption. Strong demand supports higher profits for businesses. They then increase production to respond to strong demand and positive profit expectations.
In anticipating further demand, businesses also invest in capital goods. They bought new machinery and equipment and even built factories. That in the end
create more jobs.
Tightened labor supply and upward pressure on wages
Business expansion drives an increase in labor demand. It makes the unemployment rate is low. In the boom phase, you will easily find new jobs.
Businesses are starting to struggle to find a qualified workforce. That’s because those who meet the qualifications have been employed. High demand and limited supply make the labor market tight.
As the law of supply-demand says, these conditions lead to upward pressure on wages.
Strong aggregate demand
Consumers are optimistic about their income and employment. They can easily find new jobs with promising wages.
Hence, they spend more money on the consumption of goods and services. High consumption means strong demand for businesses, both domestic and abroad.
Strong demand is not only positive for domestic producers but also abroad. Not all needs can be met from domestic production.
Accordingly, when demand grows strong, so does import demand. As a result, if the economy had previously experienced a trade deficit, the deficit value would have widened.
High tax income
The boom provides benefits for tax revenue. Tax revenue will increase as consumer income rises. More spending also means more taxes on goods and services. Finally, increased business profit also contributed to the increase in corporate taxes.
Less government social spending
The government can also save more money. A prosperous economy help reduce state spending on welfare benefits such as unemployment benefits.
Upward pressure on wages increases production costs. Businesses then pass the increased costs on product prices. They raise selling prices. Such creates upward pressure on inflation.
Higher inflation means the purchasing power of money is weakening. Workers see their current wages as insufficient to offset rising inflation. Hence, they ask for higher wages.
Wage increases put pressure on production costs again and pushed up prices for goods. As a result, inflation is getting higher. This is what we call the price-wage spiral.
Spiral pushes inflation out of control. The worst effect is leading to hyperinflation, which is terrible for the economy.
To overcome this, the central bank will usually raise interest rates gradually. The aim is to reduce aggregate demand, thereby reducing pressure on inflation.
What to read next
- Business Cycle: Its 4 Phases, Characteristics, and Effects
- Economic Boom: Meaning, Characteristics
- Economic Collapse: Signs, Causes, and Examples
- Economic Contraction: Meaning, Causes and Impacts
- Economic Crisis: Types and Effects
- Economic Depression: Causes, Examples, Effects, Possible Solutions
- Economic Expansion: Meaning, Characteristics
- Economic Recession: Causes, Effects, and Possible Solutions
- Economic Recovery: Meaning, Types, and Characteristics
- Kondratieff Cycle: Meaning, Details of the Cycle and Criticism
- Peak Phase of the Business Cycle: Meaning, Characteristics
- Real Business Cycle: Meaning, Assumptions, Causes, Criticism
- Trough Phase of the Business Cycle: Meaning and Characteristics