Economic Contraction

Definition

Economic contraction refers to a period when there is a decline in an economy's production capacity, resulting in a decrease in real GDP. It is often associated with a slowdown or recession.

Analogy

Imagine a roller coaster going downhill. Just like how the roller coaster slows down and moves downward during a contraction, an economic contraction represents a decline in economic activity and output.

Related terms

Unemployment: Unemployment refers to the number of people who are actively seeking employment but are unable to find jobs. During an economic contraction, unemployment tends to rise.

Recession: A recession is a significant and prolonged economic contraction characterized by declining GDP, increased unemployment, and reduced business activity.

Fiscal Policy: Fiscal policy refers to government actions related to taxation and spending that aim to influence the overall state of the economy. During an economic contraction, governments may implement expansionary fiscal policies to stimulate growth.