Understanding the Business Cycle

Business Cycle

Fluctuations in economic activity around a growth path

Real GDP

Main indicator measuring changes in economic activity

Recession

Phase with two successive falls in quarterly real GDP

Potential GDP

Level of GDP at full employment, growing at a constant rate

Actual GDP

Varies unpredictably due to economic shocks

Output Gap

Difference between actual and potential GDP affecting unemployment

Expansion

Phase of increasing real GDP between trough and peak

Peak

Upper turning point with economy operating above capacity

Contraction

Period of falling real GDP with negative growth rate

Trough

End of contraction phase, low demand, high unemployment

Business Cycle Length

Expansions last up to 10 years, contractions brief (1-2 quarters)

Global Business Cycle

Cyclical fluctuations in economic activity across economies

External Shocks

Events like droughts, pandemics impacting economic activity

Expansion Phase Characteristics

Rising consumer & business confidence, production, employment

Peak Characteristics

Economy above capacity, high inflation, slowed GDP growth

Contraction Phase Features

Decline in production, employment, investment, consumption

Macroeconomic indicators

Economic variables providing insight into the economy's health

Procyclical variable

Variable increasing in expansion and falling in contraction

Countercyclical variable

Variable decreasing in expansion and increasing in contraction

Leading economic indicators

Variables changing before the rest of the economy

Coincident economic indicators

Variables moving in line with economic activity

Lagging economic indicators

Variables changing after economic activity changes