1. GDP and the Business Cycle
Chapter 9
GDP and the Business Cycle

2. Growth and Fluctuations in GDP
Changes in GDP have been far from steady.
Real GDP has sometimes grown more rapidly than the long-term trend.
Real GDP has sometimes declined.
Fluctuations in GDP are not perfectly even.
Called the business cycle

3. Figure Real GDP from 1929 to 2004

4. Business Cycles
The fluctuations in economic activity that cause GDP to rise above and fall below its long term trend are called business cycles.
Business cycles are comprised of:
An expansionary phase
A peak
A contractionary phase (or recession)
A trough

5. Figure 9.2 A Typical Business Cycle

6. Dating Business Cycles
The National Bureau of Economic Research (NBER) is responsible for determining when recessions begin and end.
The NBER defines a recession as a period of significant decline in total output, income, employment and trade, usually lasting from six months to a year.
When real GDP has declined for two consecutive quarters

7. Table 9.3 Business Cycles in the Twentieth-Century United States

8. Business Cycles and the Overall Movement of the Economy
Portion of Cycle
Unemployment
Inflation
Real GDP
Peak
Low
High

9. Business Cycles and the Overall Movement of the Economy (cont’d)
Portion of Cycle
Unemployment
Inflation
Real GDP
Peak
Low
High
Contraction
Rising
Slowing
Falling

10. Business Cycles and the Overall Movement of the Economy (cont’d)
Portion of Cycle
Unemployment
Inflation
Real GDP
Peak
Low
High
Contraction
Rising
Slowing
Falling
Trough

11. Business Cycles and the Overall Movement of the Economy (cont’d)
Portion of Cycle
Unemployment
Inflation
Real GDP
Peak
Low
High
Contraction
Rising
Slowing
Falling
Trough
Expansion
Accelerating

12. Potential GDP
Potential GDP is the level of GDP that corresponds to the full employment of resources.
Occurs when there is no cyclical unemployment

13. Potential and Real GDP
How can we produce more than the potential???

14. Strategy and Policy It can be hard to hit a moving target.
Policy makers try to keep the economy as close to potential GDP as they can.
If real GDP falls below potential GDP, unemployment rises.
If real GDP rises above potential GDP, inflation increases.

15. Chapter 9 homework
Questions 8 and 19