The expansion phase is the term used in the context of the economic environment of the country, the economic environment or conditions of a country never remain the same rather they keep changing from time to time, and sometimes the country experience a boom phase or expansion phase while sometimes it has to go through contraction or recession phase. The expansion phase refers to that phase in which the country’s GDP grows for more than 2 quarters and there is an environment of hope and optimism across the country. Given below are some of the important features of the expansion phase which sets it apart from other phases of the business cycle –
Characteristics of Expansion Phase
Increase in Growth Rate of the Country
The first and foremost feature of the expansion phase is the increase in the gross domestic product of the country or growth rate of the country for 2 or more than 2 consecutive quarters, growth in GDP of the country is the first sign that country is coming out of depression or recession phase and since there can be an aberration that is the reason why an increase in GDP for 2 or more than 2 consecutive quarters is considered to be the first sign of country entering into expansion phase as far as the business cycle is concerned.
Increase in Corporate Profits
In the expansion phase, there is a rise in demand for goods as well as services which in turn results in an increase in corporate profits due to better demand and higher prices of the products sold by the company which in turn ensures that companies produce more to take advantage of increased demand which further results in the economics of scale for the company resulting in better profit margins for the companies
Rise in Employment Opportunities
In the expansion phase since there is growth and increase corporate profits, companies sensing higher future demand employ more people to be prepared to take advantage of an increase in demand resulting in a rise in the employment opportunities for the people of the country leading to a fall in the unemployment rates.
Booming Equity Markets Sign of Expansion Phase
Stock markets are the barometer for checking how the economy is doing and that is the reason why when a country enters into expansion phase it is characterized by booming equity markets where there is huge participation not only from institutional investors and mutual funds but also from retail investors as stock markets apart from fundamental and technical indicators also run on sentiments of the people and in case of the expansion phase of the economy that sentiment is positive and optimistic resulting in outperformance of stock markets as opposed to other assets class.
Increase in Disposable Income during Expansion Phase
Due to the increase in employment and rise in income of people, there is an increase in disposable income of the individuals which refers to that income that is left with an individual after incurring all expenses and paying income tax on the income. In simple words, disposable income is free to use for consumption by individuals and all this disposable income goes into buying of products or services resulting in a further increase in demand for goods and services produced by the companies.
Logistics and Supply Chain Management
In case of the expansion phase of the economy, the logistics sector as well as supply chain management see a major uptick because due to improvement in demand and production company orders raw materials from the suppliers and send the finished products to end customers which involve logistics and supply chain management and higher the economic activity higher will be demand for logistics services and supply chain management services.
As one can see from the above that the expansion phase has some unique characteristics and as an economic student you should be aware about various characteristics as it plays a key role in the early identification of economic indicators as well as the trend of economic activity and the business cycle.