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6.18: Business Cycles

  • Page ID
    47356
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    Learning Objectives

    • Explain business cycles, including recessions, depressions, peaks, and troughs

    Tracking Real GDP Over Time

    When news reports indicate that “the economy grew 1.2% in the first quarter,” the reports are referring to the percentage change in real GDP. By convention, GDP growth is reported at an annualized rate: whatever the calculated growth in real GDP was for the quarter, it is multiplied by four when it is reported as if the economy were growing at that rate for a full year.

    The graph illustrates that both real GDP and real GDP per capita have substantially increased since 1900.
    Figure 1. U.S. GDP, 1900–2016. Real GDP in the United States in 2016 (in 2009 dollars) was about $16.7 trillion. After adjusting to remove the effects of inflation, this represents a roughly 20-fold increase in the economy’s production of goods and services since the start of the twentieth century. (Source: bea.gov)

    Figure 1 shows the pattern of U.S. real GDP since 1900. The generally upward long-term path of GDP has been regularly interrupted by short-term declines. A significant decline in real GDP is called a recession. Recessions typically last at least six months (or two quarters).  An especially lengthy and deep recession is called a depression. The severe drop in GDP that occurred during the Great Depression of the 1930s is clearly visible in the figure, as is the Great Recession of 2008–2009.

    Real GDP is important because it is highly correlated with other measures of economic activity, like employment and unemployment. When real GDP rises, so does employment.

    The most significant human problem associated with recessions (and their larger, uglier cousins, depressions) is that a slowdown in production means that firms need to lay off or fire some of the workers they have. Losing a job imposes painful financial and personal costs on workers, and often on their extended families as well. In addition, even those who keep their jobs are likely to find that wage raises are scanty at best—they may even be asked to take pay cuts or work reduced hours.

    Table 1 lists the pattern of recessions and expansions in the U.S. economy since 1900. The highest point of the economy, before the recession begins, is called the peak; conversely, the lowest point of a recession, before a recovery begins, is called the trough. Thus, a recession lasts from peak to trough, and an economic upswing runs from trough to peak. The movement of the economy from peak to trough and trough to peak is called the business cycle. It is intriguing to notice that the three longest trough-to-peak expansions of the twentieth century have happened since 1960. The most recent recession started in December 2007 and ended formally in June 2009. This was the most severe recession since the Great Depression of the 1930s.

    Graph showing time on the y-axis and the level of business activity, or gdp, on the x-axis. Lines show expansion up to a peak, then a downward recession to a trough, then recovery and expansion.
    Figure 2. The Business Cycle. This is an example of a typical business cycle showing expansion, recession, then recovery. The growth trend is the average growth rate over time.
    Table 1. U.S. Business Cycles since 1900
    Trough Peak Months of Contraction Months of Expansion
     December 1900  September 1902  18  21
     August 1904  May 1907  23  33
     June 1908  January 1910  13  19
     January 1912  January 1913  24  12
     December 1914  August 1918  23  44
     March 1919  January 1920  7  10
     July 1921  May 1923  18  22
     July 1924  October 1926  14  27
     November 1927  August 1929  23  21
     March 1933  May 1937  43  50
     June 1938  February 1945  13  80
     October 1945  November 1948  8  37
     October 1949  July 1953  11  45
     May 1954  August 1957  10  39
     April 1958  April 1960  8  24
     February 1961  December 1969  10  106
     November 1970  November 1973  11  36
     March 1975  January 1980  16  58
     July 1980  July 1981  6  12
     November 1982  July 1990  16  92
     March 2001  November 2001  8  120
     December 2007  June 2009  18  73
    Source: http://www.nber.org/cycles/main.html

    A private think tank, the National Bureau of Economic Research, is the official tracker of business cycles for the U.S. economy. However, the effects of a severe recession often linger on after the official ending date assigned by the NBER.

    Watch It

    Watch this short video for another explanation of business cycles.

    A link to an interactive elements can be found at the bottom of this page.

    Business Cycle Vocabulary

    Other terminology to know in relation to the ebbs and flows of the business cycle include:

    • Overheating, which means the economy is picking up speed leading to increased inflation. It occurs when its productive capacity is unable to keep pace with growing aggregate demand. It is generally characterized by an above-trend rate of economic growth, where growth is occurring at an unsustainable rate. Boom periods are often characterized by overheating in the economy.
    • Stagflation, which means the simultaneous occurrence of stagnant growth (or recession) and inflation. It is a situation where the inflation rate is high, the economic growth rate slows down, and unemployment is also high. It raises a dilemma for economic policy since actions designed to lower inflation may exacerbate unemployment, and vice versa.

    Learning Objectives

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    Contributors and Attributions

    CC licensed content, Original
    • Modification, adaptation, and original content. Authored by: Steven Greenlaw and Lumen Learning. License: CC BY-SA: Attribution-ShareAlike
    • The Business Cycle Image. Authored by: Sophie Haci. Provided by: Houston Community College. License: CC BY: Attribution
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