Business cycle

Business cycyle is characterized by fluctuations in economic activity:

Peak - unemployment is low, incomes are high and businesses are operating at full capacity

Contraction - aggregate economic conditions began to slow.

Trough - the low point of the contraction phase is called the recessionary trough

Expansion - after the low point is reached and business conditions began to improve

Conditions during the low point are referred to as a recession (define as being a decline in Gross Domestic Product over two or more quarters). Severe recessions (both in length of time and severity of the contraction) are referred to as depressions.

Variables to determine the phase of the cycle

• Real GDP
• Real income
• Employment
• Industrial production
• Wholesale-retail sales

Notes:

• Contraction is getting shorter while expansion is getting longer nowadays.
• Recession means real GDP has decreased for 2-3 quarters, contractionary & recessionary trough phases
• Depression means prolonged and severe recession