The Business Cycle

What is the business cycle?

Fluctuations in economic activity over time, with ups (expansions) and downs (contractions) in real GDP.

Expansion

Period when the economy grows, real GDP increases, unemployment falls, and inflation may rise.

Peak

The highest point of the business cycle, where growth slows and stops.

Contraction (Recession)

Period when the economy shrinks, real GDP decreases, and unemployment rises.

Trough

The lowest point of the business cycle, marking the end of a recession and the beginning of expansion.

Recovery vs Expansion

Recovery refers to the early part of an expansion, especially after a severe recession.

Causes of fluctuations

Changes in consumer and business confidence, employment levels, productivity, total demand and supply, investment shifts, government policies, and global events.

Measuring the business cycle

Primarily through Real GDP and other indicators like unemployment rate, inflation, and consumer spending.

Importance of the business cycle

Helps governments and central banks plan policies and informs businesses and consumers for financial decisions.

PPC and the Business Cycle

The PPC illustrates the economy’s potential output; movements relative to the PPC indicate resource utilization during business cycles.

Output gap

The difference between what an economy is actually producing and what it can potentially produce.

Positive output gap

Indicates an economy is currently producing beyond its potential output.

Unemployment and output

When an economy produces more than potential output, the current unemployment rate is less than the natural rate.