MAcro CHAPTER 2.7:
Business Cycles
Business Cycles
CHAPTER SUMMARY
Over time, economies usually grow as long as there are no major, long-term disasters like civil wars. However, you also probably know that it is not always growing. There are times of rapid growth, and times where it actually shrinks. We call these up-and-down waves the business cycle. The basic idea of the business cycle can be seen in the chart below.
The business cycle shows the rise and fall of Real GDP (not nominal GDP) over time. When Real GDP reaches its highest point in a cycle, we call this a peak, and the bottom point of a cycle is called a trough. When the Real GDP curve is rising, an economy is expanding, and when the curve is falling, it is contracting. We have a few different terms for longer periods of contractions:
Recession: 6 months or more of economic contraction
Depression: 2 years or more of economic contraction greater than 10% (not every economist agrees on this definition, though)
Although recessions and depressions do happen, in the long run, we expect that the economy will follow the growth trend line (the straight, upward-sloping line). At this line, the economy is growing and experiencing full employment (unemployment = natural rate of unemployment).
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