2.7 The Business Cycle

Business Cycle

the ups and downs in an economy measured by the three macroeconomic indicators

1. Real Output

2. Unemployment

3. Inflation

Output

total production

can be expressed multiple ways:

1. Real GDP

2. Real GDP per capita

3. Nominal GDP

Time is usually expressed in quarters (3 months) of a year.

Depression

Economic situation where output falls to very low levels, and unemployment climbs to very high levels

Peak

the highest point of the business cycle (using Real GDP)

Expansionary

The part of the cycle that is increasing

Real output is increasing, and the unemployment rate is declining

Inflation may begin to accelerate

Recovery Phase

The early part of the phase from the trough

within Expansionary

Contractionary

The part of the business cycle that is decreasing

Real output is decreasing, and the unemployment rate is rising

Inflationary pressures may subside

Recession

(Later stage of a contractionary phase)

lasts at least 6 months or 2 quarters of the cycle

Unemployment will increase, but inflation will slow

Trough

The lowest point on the business cycle

If a trough is particularly deep, it is a depression

Actual Growth

Where the country is actually producing

(business cycle graph)

Potential Output

Like PPC @ natural rate of unemployment (5%) and 2% anticipated inflation

Positive Output Gap

Outside of PPC (not sustainable)

High inflation, High GDP, Low unemployment

aka inflationary gap

Negative Output Gap

Inside of PPC (inefficient)

Low inflation, Low GDP, High unemployment

aka recessionary gap

Minimum time GDP data is relevant to cycles

6 months

The “length” of a cycle

Trough to Trough

The average length of a cycle in the US history 1776-2011

6 years

Average length of a recession in US 1900-2011

14 months

Stagflation

Both Expansion and Recession at the same time

Misery Index

The unemployment rate and inflation rate together

Decline of real GDP from the previous levels usually when economists declare a depression

10%

Where is Expansionary/Positive Output Growth on a PPC graph?

Outside the PPC (inefficient)

Where is Contractionary/Negative Output Growth on a PPC graph?

Inside the PPC (unsustainable)

Where is Sustainable Growth on a PPC graph?

On the PPC line