PeakPeak
TroughTrough
Recovery
Recovery
Recession
Recession
PeakPeak
The Business Cycle and Economic Activity
1. What is the difference between a decrease in GDP and a decrease in GDP growth?
2. Explain the cyclical pattern of economies using the business cycle diagram
3. Explain the concept of potential output and its relationship to the “output gap”
Remember:
• Economic growth-increases in the quantity of output produced over a period of time (year) and expressed as:– %change in real GDP/GNI over period of time– %change in real GDP/GNI per capita over a period of
time– i.e., real GDP in 2004 was $50bil and increased to
$51bil in 2005, rate of growth is ((new-old/old)*100), so rate of growth was +2%
• Remember, %change representing growth is not always positive value; if real GDP has fallen, it will be negative– real GDP in 2006 was $60bil and decreased to $57bil
in 2007, rate of growth is ((new-old/old)*100), so rate of growth was -5%
Remember…
The same information shown on the business cycle can be shown on a production possibilities curve:– Full employment– Unemployment– Inflation
The shifters of the PPC affect GDP:– Change in
quantity/quality of resources
– Changes in technology– Changes in trade
Why is economic growth the goal of every society?
• Provides better goods and services
• Increases wages and standard of living
• Allows more leisure time
• Economy can better meet wants
Decrease in GDP vs. GDP growth
• Decrease in GDP-fall in the value of output produced, such as ex. #2 on last slide
• Decrease in GDP growth- falling rates of growth, though rates of growth may be positive (see ex )
Year Real GDP ($bil)
Real GDP growth
2007 210.0 ---
2008 215.5 2.6% (increasing GDP)
2009 219.5 1.9% (increasing GDP, falling GDP growth)
2010 223.1 1.6% (increasing GDP, falling GDP growth)
2011 217.0 -2.7% (decreasing GDP, negative GDP growth)
•Real output in most countries grows over long periods of time, but output growth is uneven and irregular
•business cycle -recurrent fluctuations in -recurrent fluctuations in
growth of real output (“ups and downs”) in the growth of real output (“ups and downs”) in the
level of economic activitylevel of economic activity• Alternating periods of Alternating periods of expansion
(increasing real output) and (increasing real output) and contraction
(decreasing real output)(decreasing real output)• Individual business cycles may vary greatly in Individual business cycles may vary greatly in
duration and intensity duration and intensity • All display a set of phasesAll display a set of phases
Business CyclesBusiness Cycles(aka (aka economic fluctuations)economic fluctuations)
Expansion• Expansion occurs
when there is positive growth in real GDP (upward sloping parts of curve)• During these periods:– Employment of
resources increases– General price level
(average overall prices) begins to rise rapidly
– Beginning of inflation
PEAKPEAK
Time
GROWTHGROWTH
TRENDTREND
Peak (prosperity phase): Peak (prosperity phase): •Real output in the economy is at a high Real output in the economy is at a high level (max real GDP)level (max real GDP)
• Marks end of expansionMarks end of expansion• Unemployment is low Unemployment is low • Domestic output may be at Domestic output may be at
capacity (price level increases capacity (price level increases rapidly)rapidly)
• Inflation may be highInflation may be high
Lev
el o
f b
usi
nes
s ac
tivi
ty
Contraction (recession) phase:Contraction (recession) phase:•Recession Recession – government determinant of two consecutive – government determinant of two consecutive
quarters (6 months) of declining outputquarters (6 months) of declining output • Real output is decreasing (falling real GDP, negative Real output is decreasing (falling real GDP, negative
growth)growth)• If the recession is prolonged, price may decline If the recession is prolonged, price may decline
(deflation) (deflation) • As contraction continues, inflation pressure fadesAs contraction continues, inflation pressure fades
• Unemployment rate is risingUnemployment rate is rising
Lev
el o
f b
usi
nes
s ac
tivi
ty
Time
RECESSIONRECESSIONGROWTHGROWTH
TRENDTREND
Lev
el o
f b
usi
nes
s ac
tivi
ty
Time
TROUGHTROUGH
GROWTHGROWTH
TRENDTREND
Trough (depression) phase:Trough (depression) phase:• Minimum (lowest) point of real GDP Minimum (lowest) point of real GDP
• end of contractionend of contraction• Widespread unemployment; output at lowest Widespread unemployment; output at lowest
pointpoint• may be short- or long-termmay be short- or long-term• no precise way to tell where decreased no precise way to tell where decreased
output (serious recession) becomes a output (serious recession) becomes a
depressiondepression
PeakPeak
TroughTrough
One cycleOne cycle
Recovery
Recovery
Rea
l GD
PR
eal G
DP
per
yea
rp
er y
ear
Recession
Recession
TimeTime
PeakPeak
Business Cycle-one cycle through 4 phasesBusiness Cycle-one cycle through 4 phasesBusiness Cycle-one cycle through 4 phasesBusiness Cycle-one cycle through 4 phases
Recessions since 1950 show that duration and Recessions since 1950 show that duration and depth are varied:depth are varied:
PeriodPeriod Duration in monthsDuration in months DepthDepth (decline in real GDP)
1953-541953-54 1010 — 3.0%— 3.0%1957-581957-58 88 — 3.5%— 3.5%1960-611960-61 1010 — 1.0%— 1.0%1969-701969-70 1111 — 1.1%— 1.1%1973-751973-75 1616 — 4.3%— 4.3%19801980 6 6 — 3.4%— 3.4%1981-821981-82 1616 — 2.6%— 2.6%1990-911990-91 88 — 2.6%— 2.6%20012001 88 app. —3.3% app. —3.3%
Innovation Innovation
Political eventsPolitical events
Random eventsRandom events
Wars Wars
Level of consumer spendingLevel of consumer spending
Seasonal fluctuationsSeasonal fluctuations
Cyclical Impacts — durable and non durableCyclical Impacts — durable and non durable
Causes of FluctuationsCauses of FluctuationsCauses of FluctuationsCauses of Fluctuations
An Actual Business CycleAn Actual Business Cycle1981 - 1990 ($ billion, 1992 dollars)1981 - 1990 ($ billion, 1992 dollars)
An Actual Business CycleAn Actual Business Cycle1981 - 1990 ($ billion, 1992 dollars)1981 - 1990 ($ billion, 1992 dollars)
Real GDP
PeakPeak
PeakPeak
TroughTrough
One CycleOne Cycle
‘80 ‘85 ‘90
4600
5200
6000
82
Ave. Unemployment Rate, 1925-1928Ave. Unemployment Rate, 1925-1928
Ave. Unemployment Rate, 1929-1933Ave. Unemployment Rate, 1929-1933
Percent Decrease in Prices, 1929-1932Percent Decrease in Prices, 1929-1932
Global Depression, 1929-1932Global Depression, 1929-1932
Six Million “Rosie the Riveters”Six Million “Rosie the Riveters”
World War II Production of these items brought us out World War II Production of these items brought us out of the Great Depression.of the Great Depression.300,000 warplanes300,000 warplanes124,000 ships124,000 ships289,000 combat vehicles and tanks289,000 combat vehicles and tanks36 billion yards of cotton goods36 billion yards of cotton goods41 billion rounds of ammunition41 billion rounds of ammunition2.4 million military trucks2.4 million military trucks111,527 tank guns and howitzers111,527 tank guns and howitzers
•$288 billion$288 billion was spent on the war, was spent on the war, •$100$100 billion in the first six months. billion in the first six months.
Unemployment hit an all-time low of Unemployment hit an all-time low of 1.2%1.2% and personal savings were 25.5%. and personal savings were 25.5%.
Top Related