Principles of Macroeconomics / Unit 3 MAC 0221 worked example, 60 to 90 seconds
Placing a Moment on the Business Cycle
The idea
To place a moment on the cycle, look at the direction of real output rather than its level. If output is rising, the economy is expanding. If it is falling, the economy is contracting. The turning points are named for what ends there: a peak is the last moment of an expansion, and a trough the last moment of a contraction. So a peak sits at a high level of output and a trough at a low one, but each is defined by the change in direction, not by the height.
In practice
Worked example: output rises for three quarters, falls for two, then rises again. The last rising quarter before the fall is the peak. The last falling quarter before the recovery is the trough. The two falling quarters are the contraction, and everything after the trough is expansion until the next peak.
Where people slip
A trough is not the worst moment to live through. Unemployment usually keeps rising for a while after output turns up, so the labor market is still deteriorating when the recession is officially over.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Builds on
Unlocks
- Nothing yet depends on this.
Something wrong in this lesson? Flag it · Sources for Principles of Macroeconomics