Business Cycles
Introduced| English | Meaning |
|---|---|
| business cycle/ˈbɪznəs ˈsaɪkl/ | Fluctuations in economic activity between expansion and contraction over time. |
| expansion/ekˈspænʃn/ | An increase in economic activity, output or the scale of a business. |
| peak/piːk/ | The high point of economic activity before an expansion gives way to contraction. |
| contraction/kənˈtrækʃn/ | A period in which overall economic activity declines. |
| recession/rɪˈseʃn/ | A significant, sustained decline in an economy's overall activity. |
| trough/trɒf/ | The low point of economic activity before a recovery or expansion begins. |
| output gap/ˈaʊtpʊt ɡæp/ | The difference between actual output and potential output. |
| potential output/pəˈtenʃl ˈaʊtpʊt/ | The real GDP an economy would make at full employment. |
| recessionary gap/rɪˈseʃənəri ɡæp/ | The shortfall of actual or equilibrium output below an economy's potential output. |
| inflationary gap/ɪnˈfleɪʃənəri ɡæp/ | The amount by which actual output exceeds potential output in an aggregate demand and supply model. |
| stabilization policy/ˌsteɪbɪlaɪˈzeɪʃn ˈpɒlɪsi/ | Fiscal or monetary measures intended to reduce fluctuations in output, employment or the price level. |
Booms and busts
- Real GDP does not climb in a smooth straight line.
- It rises and falls in a repeating up-and-down pattern.
- Booms feel great; busts throw people out of work.
- This rhythm is the business cycle 经济周期.
The four phases
- Expansion 扩张 — real GDP rises, jobs grow, unemployment falls.
- Peak 顶峰 — the highest point of output, where expansion ends.
- Contraction 收缩 — real GDP falls for a sustained period; unemployment rises. A recession 经济衰退 is often two straight quarters of falling real GDP.
- Trough 谷底 — the lowest point, where the fall stops and recovery begins.
Which phase of the cycle?
The business cycle runs expansion → peak → contraction → trough. Each phase has a distinct pattern of output and unemployment.
A recession is often defined as:
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A contraction where real GDP falls for a sustained period — often two quarters — is a recession.
Put the four phases of the business cycle in order, starting from an expansion.
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The cycle runs expansion → peak → contraction → trough, then repeats.
During an expansion, cyclical unemployment usually:
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Rising output means firms hire more, so cyclical unemployment falls.
The output gap
- Potential output 潜在产出 is the real GDP an economy would make at full employment.
- The output gap 产出缺口 = actual real GDP − potential real GDP.
- A recessionary gap 衰退缺口 (actual below potential): running cold, high unemployment.
- An inflationary gap 通货膨胀缺口 (actual above potential): running hot, rising prices.
When actual real GDP is below potential, the economy has a ______ gap.
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A recessionary gap means the economy runs cold, with high unemployment.
Why we measure it
- Worked idea. Potential real GDP is 1,200b; in a slump actual real GDP is 1,140b, so the output gap is $1{,}140 - 1{,}200 = -60$b — a recessionary gap.
- A negative gap signals idle workers and factories.
- Governments try to smooth the swings with stabilization policy 稳定政策 — adjusting spending, taxes, or interest rates.
- The whole point of measuring GDP, unemployment, and inflation is to spot which gap we are in.
Potential real GDP is 1,200 and actual real GDP is 1,140. What is the output gap? (keep the sign)
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Output gap = actual − potential = 1,140 − 1,200 = −60 — a recessionary gap.
Governments use stabilization policy to try to smooth the swings of the business cycle.
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By adjusting spending, taxes, or interest rates, policy pushes output back toward potential.
The business cycle has four phases: expansion, peak, contraction (recession), and trough. Compare actual to potential output: a recessionary gap (below) means the economy runs cold, an inflationary gap (above) means it runs hot. Stabilization policy aims to close the gap.
Write from an output gap of minus 30
- Potential real GDP is 500. Actual real GDP is 470.
- Find the output gap.
Potential real GDP is 500 and actual real GDP is 470. What is the output gap, including its sign?
470 is 30 below 500.
What is the output gap?
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Actual output is 30 below potential, so the gap is minus 30.