Business Cycle

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In macroeconomics, business cycle played an important role to show what a national economy is going; therefore, this essay will define what business cycle is and its characteristics. Besides, all of variables such as Real Gross Domestic Product (RGDP), inflation and unemployment rate and their behaviour in the business cycle will be also demonstrated in the second part. The final part of this essay will analyse and compare the situation of Australian economy and USA economy in period of 10 years since 1998 based on the concept of “the business cycle”. In addition, this is the writer’s opinion about the business cycle relied on these above data about exhibit Australian and USA economy performance.


According to Burns (1946, p.3): “business cycle is a kind of fluctuation happened in aggregate economic activity of nations that organize their work mainly in business enterprises: a cycle consists of expansions occurring about the same time in many economic activities, followed by similarly general recessions, contractions and revivals which merge into the expansion phase of the next cycle; this sequence of changes is recurrent but not periodic…” Besides, business cycle could be easy to understand that this is periodic fluctuation in the level of GDP that are involved nominal GDP and real GDP (RGDP)

In the economic, business cycle played an important role to show the economy’s situation and where it is going. In addition, it is also express a magnitude of the peaks and troughs; and the duration of the cycle.

Characteristics of Business Cycle

There are four phases of the business cycle:

1. The upturn or rehabilitating phase: the economy starts to recover

2. The expansion phase: during this phase the economy is growth rapidly or we called this the booming time.

3. The peaking out: the economy is going down or even ceases

4. The recession or slump phase: there is no growth and a decline of output.

Trend in FN RGDP

Actual RGDP





RGDP, Inflations and Unemployment’s behaviour over business cycle

1. Real Gross Domestic Product (RGDP)

_ Trend GDP is average growth rate of RGDP. In the long run, if the trend is upward it means the economic is growth

_If RGDP is above full employment:

+Aggregate demand (AD) gets over the full employment and causes to inflation AD > FN RGDP

+The difference between levels of RGDP is greater than full employment (FN) and full employment real GDP (FN RGDP) is called inflationary gap

+Inflationary gap could be increasing inflation

-If RGDP is less than full employment:

+Aggregate demand is so little AD < FN RGDP

+ The difference between levels of RGDP is less than full employment (FN) and full employment real GDP (FN RGDP) is called recessionary gap

+Recessionary gap could be increasing unemployment

Trend RGDP

Actual RGDP

Inflationary gap Full employment

Recessionary gap

(Hansen, 2008)

2. Inflation and Deflation

** Inflation:

_ Inflation is a persistent increase in the price level and causes a decrease in the value of money and purchasing power

_Inflation caused when:

+ Too much demand exists in the economy and costs are increase

+ Resource owners raise the price to get more income

** Deflation:

_ Deflation refers to a decline in the level of price. It occurs when the annual inflation rate falls below zero percent (a negative inflation rate), resulting in an increase in the real value of money.

_Deflation due to the economics of scale, scope, speed and...
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