What is the Business Cycle??!
The business cycle is the fluctuation in economic activity that an economy experiences over a period of time. A business cycle is basically defined in terms of periods of expansion or recession.
Actual Growth - shows the level of Aggregate demand over time.
Growth Trend - Shows the average growth over a period of time.
Peak - Peak is the highest point in the business cycle where Real GDP is at its highest.
Recession - is defined as two successive/consecutive quarters of negative growth.(Approx. 6 months in a row)
Slow Down - occurs after the boom, when the Real GDP starts falling.
Recovery - Occurs after a Recession (Trough) when Real GDP starts rising up again.
Negative Output Gap - When the difference between actual output and the potential output is negative.
Positive Output Gap - When the difference between actual output and the potential output is positive.
The reasons for fluctuations in the Business Cycle:
- Demand Side "Shocks" - For example, when a big housing market crashes, there will be huge fall in aggregate demand, which will lead to a fall in the Real GDP.
- Supply Side "Shocks" - For example, an increase in oil prices will lead to an increase in costs of production which results in a decrease in Economic Growth.
Examples of recession:
One of the most famous examples of recessions is the Great depression which occurred in August 1929.
it was not until the Wall Street Crash in October 1929 that the effects of a declining economy were felt, and a major worldwide economic downturn ensued.
The Wall Street Crash in October 1929 led to a sharp decline in the American Economy.
This recession led to high unemployment, poverty, low profits, deflation, plunging farm incomes, and lost opportunities for economic growth and personal advancement.
Examples of Boom in Business Cycle:
From 1982, the US experienced an economic BOOM!
