The economy goes through ups and downs, like a rollercoaster. These fluctuations, called business cycles, impact our jobs, incomes, and overall well-being. Understanding these cycles helps us navigate the economic landscape and make informed decisions.

Real GDP growth is a key indicator of economic health. When it rises, more goods are produced, jobs are created, and incomes increase. This leads to better living standards. However, during downturns, we face job losses and reduced spending, affecting our quality of life.

Business Cycles and Economic Growth

Phases of business cycles

• Business cycle: Fluctuations in economic activity over time
  • Expansion phase
    • Increasing real GDP (goods and services produced)
    • Rising employment (job creation)
    • Growing incomes (higher wages and salaries)
  • Peak
    • Highest point of economic activity (maximum output)
    • Marks the end of an expansion (transition to contraction)
  • Contraction phase (recession)
    • Decreasing real GDP (reduced output)
    • Rising unemployment (job losses)
    • Falling incomes (lower wages and salaries)
  • Trough
    • Lowest point of economic activity (minimum output)
    • Marks the end of a contraction (transition to expansion)

Real GDP and economic well-being

• Real GDP growth
  • Indicates an expanding economy
    • Businesses produce more goods and services (increased output)
    • Increased demand for labor
      • Job creation (new employment opportunities)
      • Lower unemployment rates (more people working)
    • Rising incomes (higher purchasing power)
      • Improved living standards (better quality of life)
  • Calculated using inflation adjustment to account for price changes over time
• Economic well-being
  • Positive relationship with real GDP growth
    • Higher levels of employment (more people with jobs)
    • Increased consumer spending (more money circulating in the economy)
    • Greater access to goods and services (improved availability and affordability)
  • Slow or negative real GDP growth
    • Job losses (unemployment rises)
    • Reduced consumer spending (less money circulating in the economy)
    • Decreased economic well-being (lower living standards)

Patterns in U.S. economic fluctuations

• Post-World War II era
  • Expansions have become longer
    • Improved macroeconomic policies (better monetary and fiscal management)
    • Advancements in technology and productivity (increased efficiency)
  • Recessions have become shorter and less severe
    • Effective monetary and fiscal policy responses (government intervention)
    • Increased economic diversification (less reliance on specific sectors)
• Notable recessions
  • Great Recession (2007-2009)
    • Caused by the subprime mortgage crisis and financial market instability
    • Significant decline in real GDP (severe economic contraction)
    • High unemployment rates (widespread job losses)
  • COVID-19 recession (2020)
    • Triggered by the global pandemic and associated lockdowns
    • Sharp contraction in economic activity (rapid decline in output)
    • Rapid rise in unemployment (sudden job losses)
• Long-term trends
  • U.S. economy has experienced overall growth despite cyclical fluctuations
    • Technological advancements (new innovations and improvements)
    • Productivity improvements (increased output per worker)
    • Population growth (larger labor force and consumer base)
  • Recessions have served as "corrections" within the broader context of economic expansion (temporary setbacks in long-term growth)

Economic Performance Measures

• Potential GDP: The maximum sustainable output an economy can produce when all resources are fully utilized
• Output gap: The difference between actual GDP and potential GDP
  • Positive output gap: Actual GDP exceeds potential GDP (economy operating above capacity)
  • Negative output gap: Actual GDP is below potential GDP (economy operating below capacity)
• Trend growth rate: The long-term average growth rate of real GDP, reflecting the economy's sustainable pace of expansion
• Nominal GDP: The total value of goods and services produced in an economy, measured in current prices without adjusting for inflation