LOS 25f Explain how economic growth inflation and unemployment affect the business cycle

The business cycle is characterized by fluctuations in economic activity. Real gross domestic product (GDP) and the rate of unemployment are the key variables used to determine the current phase of the cycle.

The business cycle has two phases, expansion (real GDP is increasing) and contraction or recession (real GDP is decreasing). The turning points between the phases are called the peak and the trough of the business cycle. The phases and turning points are illustrated in Figure 6.

Figure 6: Business CvcJe o kc.ii c,nr

Figure 6: Business CvcJe o kc.ii c,nr

The National Bureau of Economic Research (NBER) is the agency that tracks the phases of the U.S. business cycle. NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."1 The NBER primarily uses measures of employment, industrial production, and personal income to determine whether the economy is expanding or contracting.

In an expansion, economic growth is positive, unemployment is decreasing, and inflationary pressures are increasing. The reverse is true in a contraction.

1. "The NBER's Recession Dating Procedure," October 21, 2003, available from the NBER Web site (www.nber.org/cycles/recessions.html).

Was this article helpful?

0 0

Post a comment