THE BUSINESS CYCLE

business cycle model

a model showing the increases and decreases in a nation’s real GDP over time; this model typically demonstrates an increase in real GDP over the long run, combined with short-run fluctuations in output

expansion

the phase of the business cycle during which output is increasing

recession

the phase of the business cycle during which output is falling

depression

a deep and prolonged recession

peak

the turning point in the business cycle between an expansion and a contraction; during a peak in the business cycle, output has stopped increasing and begins to decrease

trough

the turning point in the business cycle between a recession and an expansion; during a trough in the business cycle, output that had been falling during the recession stage of the business cycle bottoms out and begins to increase again

recovery

when GDP begins to increase following a contraction and a trough in the business cycle; an economy is considered in recovery until real GDP returns to its long-run potential level

potential output

the level of output an economy can achieve when it is producing at full employment; when an economy is producing at its potential output, it experiences only its natural rate of unemployment, no more and no less

growth trend

the straight line in the business cycle model, which is usually upward-sloping and shows the long-run pattern of change in real GDP over time

positive output gap

the difference between actual output and potential output when an economy is producing more than full employment output; when there is a positive output gap, the rate of unemployment is less than the natural rate of unemployment and an economy is operating outside of its PPC (the production possibilities curve)

the difference between actual output and potential output when an economy is producing less than full employment output; when there is a positive output gap, the rate of unemployment is greater than the natural rate of unemployment and an economy is operating inside of its PPC (the production possibilities curve)