The Business Cycle

In the last video we saw how virtually all economies in the last century have fallen into a cycle of wonderful, economic boom – followed by crushing, economic bust. 

We call this the business cycle (or trade cycle) and we can see it in action graphically. 

On the vertical axis we have real GDP, and on the horizontal we have time.

When an economy’s growing, real GDP will increase…and increase…

Until we reach a boom! The economy’s buzzing with activity: animal spirits are at an all-time high, consumers are spending merrily and workers are kept busy in employment. 

But as we’ve seen historically, this boom doesn’t last long…

And soon real GDP will slump back down till we reach a bust. Animal spirits are miserably low, consumers are saving and worried about the future, and workers find themselves in unemployment.

And then the cycle repeats…

Real GDP recovers, increasing once again into a boom and then slumps back down into bust. 

And with our business cycle now sketched out…we can break it up into 4 sections!

First we’ve got our boom, then we’ve got our bust (also known as a recession))…

But in between boom and bust (or recession) we’ve got a slowdown, or slump…where real GDP starts to decrease…

And then we’ve from bust (or recession) back to boom, we’ve got the recovery – where the economy recovers, and real GDP starts to rise back towards boom.

So, in summary, the business cycle (or trade cycle) looks like:

The business (or trade cycle) looks like this…economic boom, then slump (or slowdown), then bust (or recession)…then a recovery…which takes us back to boom for the cycle to continue!