The Business Cycle

Question: Has market capitalism benefited the people of the United States? The World? 

The Business Cycle
Definition: 

• economy-wide fluctuations in production or economic activity over several months or years that occur around a long-term growth trend, and typically involve shifts over time between periods of relatively rapid economic growth and periods of relative stagnation or decline. 

How do we know: GDP Quarterly Reports

• 3 months of real GDP data + or – 
• Q I = Jan – Mar,  
• QII = Apr – June,  
• QIII = July – Sep, 
• Q IV = Oct -- Dec

Who tells us? The NBER (mostly)

• The National Bureau of Economic Research.  
• often used as the official arbitrator of the cycles

Parts of the Business Cycle 
Expansion: 2 consecutive quarters, or longer,  of growth in real GDP

Peak: The quarter when GDP stops growing.  
(This can only be recognized after the recession has begun)

Recessions/Contractions

• 2 consecutive quarters, or longer, of decline in real GDP 
• (NBER uses newer, job related measures)

Depressions

• Traditionally measured as a recession that loses at least 10%, or more, of the value of real GDP

Stagflation

• A time of increasing inflation (associated with expansions) and increasing unemployment (associated with recessions)
• Impossible under certain models, until it happened.

A Full Cycle: The time of one trough to the next trough

Historic Cycles

• Since the founding of the US, cycles have averaged approximately 6 years from trough to trough

Long Run Growth Assumptions 

• the Secular Trend.  
• Market Systems have shown long run growth in real GDP/Standard of Living as the PPF moves outward over time

Misery Index

• The number created when the Inflation Rate is added to the Unemployment Rate