APMacro: Business Cycle

Economies are always changing. Economies experience recurring periods of growth and decline in economic activity. This recurring pattern is called the business cycle. The business cycle consists of four phases. These phases include a period of growth and a period of decline as well as the turning points that mark the shift from one period to the next.

A period of economic growth is known as an expansion. During this phase of the business cycle, economic activity generally increases from month to month. The longest expansion of the U.S. economy lasted a decade, but expansions typically run out in three to five years. The point at which the expansion ends marks the peak of the business cycle. At that peak, economic activity has reached its highest level. The peak also marks the start of a decline in economic activity. Economists do not know when a peak is occurring until they look back at the economic data.At that time they designate one month as the peak phase.

Following the peak comes the contraction phase of the business cycle. A contraction is a period of general economic decline marked by a falling GDP and rising unemployment. One of the longest contractions on record (43 months) occurred at the start of the Great Depression. However, since 1945, contractions have averaged about 10 months. The lowest point of a contraction is called the trough. Like the peak, the trough marks a turning point. Once the economy hits bottom, a new expansion begins.

The term business cycle implies that expansions and contractions occur at regular, predictable intervals. But, the opposite is true. Business cycles are irregular in both length and severity. This makes peaks and troughs difficult to predict. Nonetheless, economists attempt to do that using three economic indicators: GDP, inflation rate, and unemployment rate. Economists categorized the indicators they use to track the business cycle based on whether they signal a future change, an ongoing change, or a change that has already begun.




Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: