Learn the toughest concepts covered in your Macroeconomics class with step-by-step video tutorials and practice problems.

Introducing Economic Concepts

Introducing Concepts - Business Cycle



Business Cycle

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So now let's discuss the timeline of an economy as a whole, as it goes through what we call the business cycle. So business cycle, it's not necessarily a cycle in that it follows the same length of time, when we think of a cycle, it might be that it follows a certain length of time. Well, the cycle can last any number of years. And what we call the different sections of the cycle are based on the increases and decreases in economic activity that happened during that time. So the best way to talk about the business cycle and to get our key definitions down is to check it out on a graph. So let's check out this graph right here, notice on our why access we have employment or production. So generally when we talk about how well is this economy doing, we're going to say how much production they have as a production increases. That's a good thing for the economy. Just like employment, right? As more of the citizens are employed? Well, that's a good thing. Less. If there's more unemployment, less citizens employed, that's kind of a bad thing. Right? So let's go ahead and go through these key definitions of the business cycle. And let's check out these different points on the graph. So what we have here is we'll have that level of employment or level of production on that Y axis and on this X axis we're talking about time. So time is passing here. So different levels at different points in time, how much production is there in the economy or what's the level of employment. Right. That's how we're going to gauge how well the the economy is doing. So notice how we start here on an increase, right? The business cycle here we're going through an increase and we reach this point where it's at the very top. And guess what we call that top top point, we call that point the peak. Right? So notice we've got several peaks here, right? We've got a peak there and then the line starts to fall again and then it goes up and we reach another peak up here. Right? So we've got two peaks on this graph. And then after the peak we go through a period of decline. Right? So see how the production starts to decline here. After the peaks what we call these sections of the business cycle, we call them recessions and we've got them labeled here in this light purple on the graph. So the definition of these recessions is when that production is decreasing, it's on a decrease over time. Right? So notice after we go through this period of decrease we're gonna bottom out at the end of the recession we hit the very bottom, right? So notice we've got a couple of points here where we hit rock bottom and at that rock bottom we call it the trough. T. R. O. U. G. Eight H trough. So that's the very bottom, it's the opposite of a peak, right? The peak marks the very top where we head into a recession and then we hit the bottom the trough and then we come back up and guess what happens while we're coming back up. We're having what's called an expansion. So I'll do that in a different color here. So as we're going up we're gonna be going through an expansion. So those are the four key terms. When we talk about the business cycle, we talk about the peak and the trough and the recession and the expansion. So let's go ahead and do some formal definitions down here. So when we talk about the recession we're gonna kind of go in the order right we're gonna be going through a recession, hit a trough, go through an expansion, get to a peak and then it cycles back around, we'll go through a recession again, that's basically how the business cycle goes. So we can kind of go like this, we'll have like 1234 and it goes down down down and then cycles back up and around. Cool. So the recession, it's a periodic period of economic downturn when employment and production, what are they doing during a recession? Are they increasing or decreasing? Like we saw in the graph they're decreasing right during the recession, we see that the employment and production are decreasing right and that should kind of make logical sense. The economy is going through a recession. That's kind of a bad thing. So these things are decreasing right? And another term we use for uh for recession. Sometimes you'll see this in your textbook, sometimes they're called contractions of the economy, right? A contraction or recession, those are interchangeable. So after the recession we're gonna hit the trough the rock bottom, right? The trough, is that rock bottom for that business cycle? And this is where the point where the economy turns from recession to expansion, right? So it's switching, we've hit the bottom and now we're turning back up to start recovering again. So the expansion, this is the periodic the period of economic upturn. So what's happening during this period is that the employment? Okay. And production, what are they doing now now? They're increasing right now, they're increasing through the expansion. Like we saw in the graph, and just like we have another term for the recessions, we've had another term for the expansions sometimes called recoveries, the economy is recovering from the recession, we start recovering and finally we hit a peak, right? So after we hit the peak, this is where we're turning from expansion back into a recession. Cool. So this is the business cycle. We've got 44 key definitions to remember here, the recession leads to the trough, then we start expanding again through the expansion, hit a peak and then recession trough expansion peak, Right? So that's how it's gonna keep going there. Alright. So just like you saw on the graph, we had this period of expansion where we're starting here, then we hit our peak, go through the trough through the recession. Excuse me, hit the trough expansion, peak recession trough expansion, Right? So that is the business cycle and it keeps happening. And uh that's basically where uh where we get these definitions from. Cool. So let's take a pause right quick, and we'll do a practice problem related to business cycles.

Which of the following marks the beginning of a recovery in the business cycle?