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Chapter 9
GDP and the
Business Cycle
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
Figure 9.1
Real GDP from 1929 to 2004
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
Figure 9.2 A Typical Business Cycle
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
Table 9.3 Business Cycles in the
Twentieth-Century United States
Business Cycles and the Overall
Movement of the Economy
Portion of
Cycle
Unemployment
Inflation
Real GDP
Peak
Low
High
High
Business Cycles and the Overall
Movement of the Economy (cont’d)
Portion of
Cycle
Unemployment
Inflation
Real GDP
Peak
Low
High
High
Contraction
Rising
Slowing
Falling
Business Cycles and the Overall
Movement of the Economy (cont’d)
Portion of
Cycle
Unemployment
Inflation
Real GDP
Peak
Low
High
High
Contraction
Rising
Slowing
Falling
Trough
High
Low
Low
Business Cycles and the Overall
Movement of the Economy (cont’d)
Portion of
Cycle
Unemployment
Inflation
Real GDP
Peak
Low
High
High
Contraction
Rising
Slowing
Falling
Trough
High
Low
Low
Expansion
Falling
Accelerating
Rising
Potential GDP
• Potential GDP is the level of GDP
that corresponds to the full employment
of resources.

Occurs when there is no cyclical
unemployment
Potential and Real GDP
How can we produce more than the potential???
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.
Chapter 9 homework
• Questions 8 and 19