► The value of real GDP over time shows periodic
fluctuations in its movement
► The business cycle refers to the periodic fluctuations
of economic activity about its long term growth trend
► The Business cycle is the more or less regular pattern
of expansion (recovery) and contraction (recession) in economic activity around the path of trend growth.
At cyclical peak, economic activity is high relative to trend At a cyclical trough, the low point in economic activity is reached.
The business cycle
O fig Time
► The trend path of output is the smooth path of long-
run output once its short-term fluctuations are averaged out
► Fluctuations about the trend in real GDP.
► Potential output is the output (GDP) produced if all
the factors of production are fully employed
► Economic Recession: “a period of significant decline in
total output, income, employment, and trade lasting from six months to a year, and marked by widespread contractions in many sectors of the economy” (NBER)
“Two consecutive quarters of declining real GDP”
- Informal definition.
► Economic Depression: is a prolonged period of severe
Deep recession is known as Depression
Expansion and Contraction:
The Business Cycle
An expansion, or boom, is the period in the business cycle from a trough up to a peak, during which output and employment rise.
A contraction, recession, or slump is the period in the business cycle from a peak down to a trough, during which output and employment fall. (At least two quarters of falling real GDP)
Depression: a prolonged period of severe economic contraction
Features of Business Cycles
References: ► Chapter 7 and 14, ‘Principles of Macroeconomics’, 8th edn., by Michael Melvin and William Boyes. Thank You