Learning Objectives

Learning Objectives

By the end of this section, you will be able to do the following:
  • Explain recessions, depressions, peaks, and troughs
  • Evaluate the importance of tracking real GDP over time
  • Analyze the impact of economic fluctuations on a country’s output and price level

When news reports indicate that “the economy grew 1.2 percent in the first quarter,” the reports are referring to the percentage change in real GDP. By convention, GDP growth is reported at an annualized rate: Whatever the calculated growth in real GDP was for the quarter, it is multiplied by four when it is reported as if the economy were growing at that rate for a full year.

The graph illustrates that both real GDP and real GDP per capita have substantially increased since 1900.
Figure 5.10 U.S. GDP, 1900–2014 Real GDP in the United States in 2014 was about $16 trillion. After adjusting to remove the effects of inflation, this represents a roughly 20-fold increase in the economy’s production of goods and services since the start of the 20th century. (Bureau of Economic Analysis, 2013).

Figure 5.10 shows the pattern of U.S. real GDP since 1900. The generally upward long-term path of GDP has been regularly interrupted by short-term declines. A significant decline in real GDP is called a recession. An especially lengthy and deep recession is called a depression. The severe drop in GDP that occurred during the Great Depression of the 1930s is clearly visible in the figure, as is the Great Recession of 2008–2009.

Real GDP is important because it is highly correlated with other measures of economic activity, like employment and unemployment. When real GDP rises, so does employment.

The most significant human problem associated with recessions (and their larger, uglier cousins, depressions) is that a slowdown in production means that firms need to lay off or fire some of their workers. Losing a job imposes painful financial and personal costs on workers, and often on their extended families as well. In addition, even those who keep their jobs are likely to find that wage raises are scanty at best, or they may even be asked to take pay cuts.

Table 5.7 lists the pattern of recessions and expansions in the U.S. economy since 1900. The highest point of the economy, before the recession begins, is called the peak; conversely, the lowest point of a recession, before a recovery begins, is called the trough. Thus, a recession lasts from peak to trough, and an economic upswing runs from trough to peak. The movement of the economy from peak to trough and trough to peak is called the business cycle. It is intriguing to notice that the three longest trough-to-peak expansions of the 20th century have happened since 1960. The most recent recession started in December 2007 and ended formally in June 2009. This was the most severe recession since the Great Depression of the 1930s.

Peak Trough Contraction Expansion
December 1854 (IV) -- --
June 1857(II) December 1858 (IV) 18 30
October 1860(III) June 1861 (III) 8 22
April 1865(I) December 1867 (I) 32 46
June 1869(II) December 1870 (IV) 18 18
October 1873(III) March 1879 (I) 65 34
March 1882(I) May 1885 (II) 38 36
March 1887(II) April 1888 (I) 13 22
July 1890(III) May 1891 (II) 10 27
January 1893(I) June 1894 (II) 17 20
December 1895(IV) June 1897 (II) 18 18
June 1899(III) December 1900 (IV) 18 24
September 1902(IV) August 1904 (III) 23 21
May 1907(II) June 1908 (II) 13 33
January 1910(I) January 1912 (IV) 24 19
January 1913(I) December 1914 (IV) 23 12
August 1918(III) March 1919 (I) 7 44
January 1920(I) July 1921 (III) 18 10
May 1923(II) July 1924 (III) 14 22
October 1926(III) November 1927 (IV) 13 27
August 1929(III) March 1933 (I) 43 21
May 1937(II) June 1938 (II) 13 50
February 1945(I) October 1945 (IV) 8 80
November 1948(IV) October 1949 (IV) 11 37
July 1953(II) May 1954 (II) 10 45
August 1957(III) April 1958 (II) 8 39
April 1960(II) February 1961 (I) 10 24
December 1969(IV) November 1970 (IV) 11 106
November 1973(IV) March 1975 (I) 16 36
January 1980(I) July 1980 (III) 6 58
July 1981(III) November 1982 (IV) 16 12
July 1990(III) March 1991(I) 8 92
March 2001(I) November 2001 (IV) 8 120
December 2007 (IV) June 2009 (II) 18 73
Table 5.7 U.S. Business Cycles Since 1900 (The National Bureau of Economic Research, n.d.)

A private think tank, the National Bureau of Economic Research (NBER), is the official tracker of business cycles for the U.S. economy. However, the effects of a severe recession often linger after the official ending date assigned by the NBER.

One particular approach to explaining the business cycle is the Austrian business cycle theory. This stems from the work of the noted Austrian School economists Ludwig von Mises and Friedrich Hayek. Hayek is noted for his many contributions to modern economics. Hayek shared the 1974 Nobel Prize in Economics for his work on the business cycle. The Austrian approach pioneered by Hayek argues that business cycle fluctuations occur due to changes in credit as a result of central bank monetary policy.