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By the end of this section, you will be able to:

  • 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% 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.

U.s. gdp, 1900–2014

The graph illustrates that both real GDP and real GDP per capita have substantially increased since 1900.
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 twentieth century. (Source: bea.gov)

[link] 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 the workers they have. 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.

[link] 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 twentieth 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 1930’s.

(Source: http://www.nber.org/cycles/main.html)
U.s. business cycles since 1900
Trough Peak Months of Contraction Months of Expansion
December 1900 September 1902 18 21
August 1904 May 1907 23 33
June 1908 January 1910 13 19
January 1912 January 1913 24 12
December 1914 August 1918 23 44
March 1919 January 1920 7 10
July 1921 May 1923 18 22
July 1924 October 1926 14 27
November 1927 August 1929 23 21
March 1933 May 1937 43 50
June 1938 February 1945 13 80
October 1945 November 1948 8 37
October 1949 July 1953 11 45
May 1954 August 1957 10 39
April 1958 April 1960 8 24
February 1961 December 1969 10 106
November 1970 November 1973 11 36
March 1975 January 1980 16 58
July 1980 July 1981 6 12
November 1982 July 1990 16 92
March 2001 November 2001 8 120
December 2007 June 2009 18 73

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 on after the official ending date assigned by the NBER.

Key concepts and summary

Over the long term, U.S. real GDP have increased dramatically. At the same time, GDP has not increased the same amount each year. The speeding up and slowing down of GDP growth represents the business cycle. When GDP declines significantly, a recession occurs. A longer and deeper decline is a depression. Recessions begin at the peak of the business cycle and end at the trough.

References

The National Bureau of Economic Research. “Information on Recessions and Recoveries, the NBER Business Cycle Dating Committee, and related topics.” http://www.nber.org/cycles/main.html.

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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