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3 Tutorials that teach Business cycles--Expansionary/Recessionary (NBER)

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Author: Kate Eskra
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This lesson covers the business cycles.

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Tutorial

Source: Image of Business Cycle created by Kate Eskra, Graph of Real GDP 2000 to 2013, St. Louis Federal Reserve gdpc1 series, public domain, http://research.stlouisfed.org/fred2/graph/

## Video Transcription

Hi, welcome to macroeconomics. This is Kate. This tutorial is on business cycles. As always, my key terms are in red, and my examples are in green. So in this tutorial, we'll be talking about how a business cycle is a depiction of GDP growth and contraction over time. You'll be able to recognize an expansion, a contraction. You'll see peaks and troughs on a business cycle. And finally, we'll talk about how it is that a recession or expansion is measured.

So first of all, let's remind ourselves what GDP is. GDP is Gross Domestic Product. And it's the sum of all final goods and services being produced within a nation's domestic borders. This is how we measure economic activity in our country from one period to the next, whether it's from year to year or quarter to quarter. And the idea is that we hope that, over time, we're experiencing GDP growth. So GDP growth is simply the measure of change in GDP over time.

So here's a business cycle. As you'll notice, GDP, that gross domestic product or our nation's output, is on the y-axis. Whereas time is on the x-axis. So over time, the hope is that there's a trend of growth. If I were to put a line here, you would hope that over time, our GDP obviously is growing. But in the short run, it's very normal for our economy to go through these periods of growth or expansion and then contraction.

So like I said, this is just one business cycle here that is showing that sometimes it's growing pretty quickly, and then other times it's shrinking. But the idea is, again, over time we're hoping that the trend is one of growth. So the business cycle is really defined as the movement of an economy through what you just saw. Through a time of expansion, then a peak, a time of contraction, then a trough. And it really helps us to assess economic activity throughout time.

So the NBER is the National Bureau of Economic Research, which is the organization that measures this business cycle activity. And so the NBER is the organization that establishes, officially, the end and the start of the recessionary period. So if you were interested in looking this up, I just went here to check it out the other day. It has all of its official data, and you can actually see every single business cycle since 1854 on their website. If you are interested, you can check out that link.

So a recession is defined as a decrease in economic activity as reflected in GDP. So basically, GDP is shrinking. And it's occurring during the contraction period of that business cycle. So again, here you can see this period right here, where GDP is shrinking, would be our recession.

So according to the NBER I just quoted here, they define a recession as a significant decline in economic activity spread across the economy, lasting more than a few months. So this is not something that happens for a couple of weeks. Generally in most economics textbooks, they're going to say about six months. So two quarters that it would have to last in order to be considered a recession.

And normally, this is going to be visible in real GDP. So real GDP would be shrinking. Real income-- which means that overall, adjusted for inflation, people are making less money. Employment. So employment figures would drop, while unemployment figures would be going up. Industrial production would start to fall, and wholesale retail sales would also be falling.

So during times of economic contraction, just as a general overview here, remember GDP is shrinking. And the unemployment rate tends to rise during any contraction. And we call this cyclical. So if you notice, this business cycle thing, it's cyclical really. Because unfortunately, once some workers begin to lose their jobs, then think about it. Those people don't have as much money, they're laid off. If you were laid off from your job, would you go out to eat? Would you spend money like crazy at Christmas time? All of those things. You start cutting back on your expenditures. Well then that hurts businesses even further. So then businesses lay off more workers, because they've noticed that demand has fallen off for their goods and services.

And the cycle just continues, and it gets worse and worse. So part of macroeconomics, we'll be talking about what the government, or what our Federal Reserve System, can try to do to intervene at this point. OK. So here is a graph are you showing that, this is just from the year 2000 to 2013. You can see here that these gray periods are official recessions. And you can see that during recessions, GDP does tend to shrink.

Notice that this one here in 2001, this was right after 9/11. That was not as significant as the recession experienced starting at the very end of 2007. So GDP is declining much more significantly there. OK. So now on the contrary, an expansion is the business cycle period that coincides with growth in an economy. So according to the NBER, if GDP is growing at a rate faster than the overall time trend, that's when we're said to be in an expansion. So obviously, expansion is this period here, where output, or GDP, is growing.

That peak that you saw is defined as the business cycle period that coincides with the maximum attainable GDP growth rate for a given point in time. So that would be right here. So remember, this is one business cycle-- it's a short run. And this would be the maximum able to be produced by our economy at any given point in time in the short run.

And peaks are going to happen between expansions and contractions, or recessions, whereas the trough is that business cycle period that coincides with the lowest GDP growth rate for a given point in time. And that's right here. So this would happen between recessions and the next period of expansion. So obviously, when things are really bad in an economy, and we're in a recession, we're always hoping that we're actually at the trough. Because that means we've experienced the worst of it, and we're ready to turn around again.

So as a recap of what we talked about in this tutorial, we looked at that business cycle as a depiction of GDP growth and contraction over time. We looked at where the expansion would be, contraction, the peaks and troughs. And we talked about how the NBER measures recessions and expansions.

Thanks so much for listening. Have a great day.

Terms to Know

The movement of an economy through expansion, peak, contraction, and trough over time; an assessment of economic activity through time.

Expansion

The business cycle period that coincides with growth in an economy.

GDP

Gross Domestic Product; the sum of all final goods and services sold within a nation’s domestic borders; a measurement of economic activity.

GDP Growth

The measure of change in GDP over time.

NBER

National Bureau of Economic Research; the economic research organization that is the barometer of business cycle activity. The NBER establishes the end and start of the recessionary period.

Peak

The business cycle period that coincides with the maximum obtainable GDP growth rate for a given point in time.

Recession

A decrease in economic activity as reflected in GDP and occurring during the contraction period of a business cycle.

Trough

The business cycle period that coincides with the lowest GDP growth rate for a given point in time.