Glossary
Business Cycle
The natural fluctuation of economic activity, characterized by periods of expansion and contraction in real GDP.
Example:
Economists constantly monitor indicators like GDP growth and unemployment to determine where the economy is in its current business cycle.
Contraction Phase
A period in the business cycle characterized by decreasing real GDP, rising unemployment, and often falling inflation.
Example:
During a contraction phase, businesses may reduce production and lay off workers due to decreased consumer demand.
Depression
A severe and prolonged downturn in economic activity, much more intense and longer-lasting than a recession.
Example:
The Great Depression of the 1930s saw widespread unemployment and a massive decline in global trade.
Expansion Phase
A period in the business cycle characterized by increasing real GDP, low unemployment, and often rising inflation.
Example:
During an expansion phase, businesses are hiring more workers, and consumer spending is robust, leading to overall economic growth.
Gross Domestic Product (GDP)
The total monetary value of all final goods and services produced within a country's borders during a specific period, typically a year.
Example:
If the U.S. economy produced $28 trillion worth of goods and services last year, that would be its GDP.
Growth trend line
A line on a business cycle graph that represents the long-run average or potential growth rate of an economy's real GDP.
Example:
Even during a recession, policymakers aim to implement measures that will eventually bring the economy back to its long-term growth trend line.
Inflation
A sustained increase in the general price level of goods and services in an economy over a period of time, leading to a fall in the purchasing power of money.
Example:
If the price of your favorite coffee rises from 3.50 over a year, you are experiencing inflation on that item.
Inflationary Gap
A situation where the actual output of an economy exceeds its potential output, leading to upward pressure on prices.
Example:
If consumer demand is so high that factories are operating beyond their sustainable capacity, the economy might be experiencing an inflationary gap.
Peak
The highest point of economic activity in the business cycle, marking the end of an expansion and the beginning of a contraction.
Example:
After months of rapid growth, the economy reached its peak before starting to slow down.
Recession
A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
Example:
The 2008 financial crisis led to a severe recession as housing markets collapsed and unemployment soared.
Trough
The lowest point of economic activity in the business cycle, marking the end of a contraction and the beginning of a new expansion.
Example:
After hitting its trough, the economy slowly began to recover as consumer confidence improved and businesses started investing again.
Unemployment
The percentage of the labor force that is actively seeking employment but unable to find a job.
Example:
During an economic downturn, many factories might close, leading to a rise in the national unemployment rate as workers lose their jobs.