3.1 Business Cycle Flashcards
business cycle
The business cycle refers to the short-term fluctuations in real GDP over time, consisting of alternating periods of economic expansion and contraction around the long-term growth trend.
A business cycle represents the changing levels of economic activity that an economy experiences over time, measured by changes in real GDP (in billions or trillions of the local currency) or real GDP growth figures (percentage). Each textbook names the different stages of the business cycle slightly differently. In general, these are several of the different phases along a business cycle: recovery, expansion (growth), boom, peak (overheating), downturn, contraction, slump (recession), and trough.
potential output
The level of real GDP that an economy can produce when operating at full employment (i.e., when all resources are used efficiently without inflationary pressure).
boom
A boom is a period of rapid economic growth above the long-term trend, usually marked by high output, low unemployment, and rising inflation.
* Overheating economy: Period of high economic growth resulting in high levels of inflation and peak;
* The central bank will usually raise the main interest rates;
downturn
A downturn is the phase when economic growth slows and the economy begins to move from a boom toward a contraction or recession.
recession
A recession is defined as two consecutive quarters of negative real GDP growth, typically accompanied by falling output and rising unemployment.
* A period of two consecutive quarters in
which GDP falls (negative growth rate).
This means that production,
employment and real income all fall;
* Most recessions tend to have a length
of between 6 to 18 months;
recovery
Recovery is the phase following a recession where real GDP begins to rise again, leading to increased output, employment, and income.
trough
The lowest point in the business cycle where output, employment, and income reach their minimum levels before economic recovery begins.
expansion
An expansion is a phase of increasing real GDP, rising employment, and improving economic indicators — moving the economy toward or beyond potential output.
* Gross domestic product (GDP) is increasing and unemployment falls;
* Economy moves from a trough to a peak. It is a period when business activity
increases and gross domestic product expands until it reaches a peak;
* The start of the expansion phase is also known as “economic recovery”.
contraction
Contraction is a period of declining real GDP and economic activity, often leading to rising unemployment and reduced consumer spending.
actual output
The real level of GDP produced in the economy at a given time, which may be above or below potential output depending on the phase of the business cycle.
long term growth trend
The average path of growth an economy follows over time, reflecting potential output and improvements in productivity, technology, and resources.
peak
The peak is the highest point in the business cycle, where real GDP reaches its maximum before economic activity begins to slow. It marks the end of an expansion and the beginning of a downturn or contraction.
long-term growth
An increase in the productive capacity of an economy over time, typically shown by:
1. an outward shift of the PPC (Production Possibilities Curve), and
2. a rightward shift of the LRAS curve (Long-Run Aggregate Supply) in the AD–AS model.
This growth reflects increases in the quantity and/or quality of factors of production, and improvements in technology.
cyclical (demand deficient) unemployment
Unemployment caused by a fall in aggregate demand and a slowdown in economic activity, typically occurring during a recession or downturn in the business cycle. Firms reduce output, leading to fewer workers being needed.
rising vs slowing growth
Rising growth: The rate of growth is increasing (e.g. from 1.2% to 1.6%).
Slowing growth: The economy is still growing, but at a slower rate (e.g. from 1.2% to 1.1%).
In both cases, GDP is increasing, but at different speeds.
what does it mean if the growth rate is negative?
A negative growth rate means the economy has shrunk — total GDP has decreased over a time period. This is a fall in output, not just a slowdown in growth.
