- Business cycle
- The business cycle is the economy's movement from peak to trough and trough to peak, as real GDP rises and falls around its long-run trend.
- Recession
- A recession is a significant decline in real GDP, lasting from the peak of the cycle to its trough.
The turning points and extremes of the cycle
Can you name the two turning points and the two extremes of the cycle?
Four words describe where the economy is in its cycle.
The peak is the highest point of the economy, before a recession begins.
Can you think of an example?
After several years of strong growth, real GDP stops rising one quarter and starts to fall the next: the quarter before the fall is the peak.
The trough is the lowest point of a recession, before a recovery begins.
Can you think of an example?
Real GDP has fallen for four quarters and then rises again. The last quarter of falling output marks the trough.
A boom is a period when real GDP grows faster than its trend and rises above potential, so the economy runs short of spare capacity.
Can you think of an example?
Firms struggle to fill vacancies, order books are full, house prices climb and shops raise prices, because demand runs ahead of what firms can supply.
A depression is an especially lengthy and deep recession.
Can you think of an example?
In the 1930s output fell for years across many countries and unemployment stayed far above normal for most of the decade.