Economics Online Tutor
The Business Cycle,
Unemployment, & Inflation
This section begins on this page with a discussion
of the business cycle.  For other topics in this
section, click on these links:

UNEMPLOYMENT

INFLATION
The most widely-used measure of the health of an economy is GDP.  Real GDP, measured within an
economy over time, indicates whether the economy is expanding or contracting, and by how much.

When real GDP is rising, the economy is growing.  A healthy economy will grow over time; an increase in
real GDP per capita is an indication of a rising standard of living.

Economies do not grow at a constant rate, however.  Changes in real GDP follow a pattern, which is called
the business cycle.  The business cycle varies in length of time, but the pattern is always the same, a
series of stages in this order: expansion, peak, contraction, and trough.


Expansion: Also called a boom period, this is a period of economic growth.

Peak: The point where expansion ends and contraction begins.

Contraction: A period of decline in real GDP.  This would be a period known as a recession.

Trough: The point where contraction ends, and the cycle starts over with another expansion.



It is worth noting that the United States has had several well-publicized recessions since the 1950s, yet
has averaged about 3% annual growth during the same time period.  Periods of expansion tend to be
much longer than periods of contraction (recession).  Each business cycle is different, but recessions in
the United States have lasted roughly one year on the average.

Since economic growth is desirable, special focus is on recessions and their side effects.

[
study tip: click here for a list of recessions throughout the entire history of the United States.  This list is
from a page in this website; it can be found from the menu of the opinion section of the website, called
From Textbook to the Real World]

SINCE ECONOMIC GROWTH IS DESIRABLE, SPECIAL FOCUS IS ON RECESSIONS AND THEIR SIDE-EFFECTS.


Definition of a recession:

Recession: A period of significant decline in total output, income, employment, and trade, usually lasting
from six months to a year, and marked by widespread contractions in many sectors of the economy.

This is the official definition used in the United States.  It is defined by the National Bureau of Economic
Research (NBER).  Many people consider a recession to be two consecutive quarters of declining real
GDP, but that is not the official definition.  In fact, the official definition of a recession is not based on GDP
statistics at all, although as a practical matter the results would be the same if it were.  But the NBER
focuses on monthly, not quarterly, data.  Because real GDP is measured only quarterly, the NBER focus is
on these monthly data: employment, real personal income less transfer payments, the volume of sales of
manufacturing and wholesale-retail sectors adjusted for price changes, and industrial production.


Indicators:


Indicators are variables that tend to move along with the business cycle.  They are classified as leading
indicators, coincident indicators, and lagging indicators.  Indicators are used to identify changes in the
stage of the business cycle.

Leading indicators: Economic variables that tend to change before real GDP changes.  Since these are
changes that occur before changes in output occur, they are used to predict future output.  However,
leading indicators can be very unstable.  Unless they move in the same direction for several consecutive
months, their usefulness for predictions is limited.

Coincident indicators: Economic variables that tend to change at the same time that real GDP changes.

Lagging indicators: Economic variables that tend to change after real GDP changes.




The following table summarizes these indicators:
LEADING
INDICATORS
AVERAGE WORKWEEK; UNEMPLOYMENT CLAIMS; MANUFACTURERS'
NEW ORDERS; STOCK PRICES; NEW PLANT AND EQUIPMENT ORDERS;
NEW BUILDING PERMITS; DELIVERY TIMES OF GOODS; INTEREST RATE
SPREAD; MONEY SUPPLY; CONSUMER EXPECTATIONS
COINCIDENT
INDICATORS
PAYROLL EMPLOYMENT; INDUSTRIAL PRODUCTION; PERSONAL
INCOME; MANUFACTURING AND TRADE SALES
LAGGING
INDICATORS
LABOR COST PER UNIT OF OUTPUT; INVENTORIES TO SALES RATIO;
UNEMPLOYMENT DURATION; CONSUMER CREDIT TO PERSONAL
INCOME RATIO; OUTSTANDING COMMERCIAL LOANS; PRIME INTEREST
RATE; INFLATION RATE FOR SERVICES
This page, along with additional commentary, was posted on
the
"Economics Online Tutor" Facebook page's timeline on
August 21, 2012.
Do you find the information on this page helpful?

The left column of the
home page lists all of the economics topics
covered in this website. Now, you can receive a FREE ebook version of
the information in this site under the title

Basic Economics for Students and Non-Students Alike
By Jerry Wyant

Or if you prefer, you may purchase a paperback version from Amazon,
Barnes & Noble, Sony, Apple, and other distributors.

This makes a great handbook and reference. Students: please help to
make sure your classmates and teachers are aware of this resource!

Click here to order a FREE ebook from smashwords.com

Click here to purchase a paperback version from amazon.com