Business Cycles
| English | Chinese | Pinyin |
|---|---|---|
| business cycle | 经济周期 | jīng jì zhōu qī |
| expansion | 扩张 | kuò zhāng |
| peak | 顶峰 | dǐng fēng |
| contraction | 收缩 | shōu suō |
| recession | 经济衰退 | jīng jì shuāi tuì |
| trough | 谷底 | gǔ dǐ |
| output gap | 产出缺口 | chǎn chū quē kǒu |
| potential output | 潜在产出 | qián zài chǎn chū |
| recessionary gap | 衰退缺口 | shuāi tuì quē kǒu |
| inflationary gap | 通货膨胀缺口 | tōng huò péng zhàng quē kǒu |
| stabilization policy | 稳定政策 | wěn dìng zhèng cè |
Booms and busts
- Real GDP does not climb in a smooth straight line.
- It rises and falls in a repeating up-and-down pattern.
- Booms feel great; busts throw people out of work.
- This rhythm is the business cycle 经济周期.
The four phases
- Expansion 扩张 — real GDP rises, jobs grow, unemployment falls.
- Peak 顶峰 — the highest point of output, where expansion ends.
- Contraction 收缩 — real GDP falls for a sustained period; unemployment rises. A recession 经济衰退 is often two straight quarters of falling real GDP.
- Trough 谷底 — the lowest point, where the fall stops and recovery begins.
Which phase of the cycle?
The business cycle runs expansion → peak → contraction → trough. Each phase has a distinct pattern of output and unemployment.
A recession is often defined as:
A contraction where real GDP falls for a sustained period — often two quarters — is a recession.
Put the four phases of the business cycle in order, starting from an expansion.
The cycle runs expansion → peak → contraction → trough, then repeats.
During an expansion, cyclical unemployment usually:
Rising output means firms hire more, so cyclical unemployment falls.
The output gap
- Potential output 潜在产出 is the real GDP an economy would make at full employment.
- The output gap 产出缺口 = actual real GDP − potential real GDP.
- A recessionary gap 衰退缺口 (actual below potential): running cold, high unemployment.
- An inflationary gap 通货膨胀缺口 (actual above potential): running hot, rising prices.
When actual real GDP is below potential, the economy has a ______ gap.
A recessionary gap means the economy runs cold, with high unemployment.
Why we measure it
- Worked idea. Potential real GDP is 1,200b; in a slump actual real GDP is 1,140b, so the output gap is $1{,}140 - 1{,}200 = -60$b — a recessionary gap.
- A negative gap signals idle workers and factories.
- Governments try to smooth the swings with stabilization policy 稳定政策 — adjusting spending, taxes, or interest rates.
- The whole point of measuring GDP, unemployment, and inflation is to spot which gap we are in.
Potential real GDP is 1,200 and actual real GDP is 1,140. What is the output gap? (keep the sign)
Output gap = actual − potential = 1,140 − 1,200 = −60 — a recessionary gap.
Governments use stabilization policy to try to smooth the swings of the business cycle.
By adjusting spending, taxes, or interest rates, policy pushes output back toward potential.
The business cycle has four phases: expansion, peak, contraction (recession), and trough. Compare actual to potential output: a recessionary gap (below) means the economy runs cold, an inflationary gap (above) means it runs hot. Stabilization policy aims to close the gap.