The Economic Business Cycle

The business cycle is defined as “the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables.” (Moffatt, 2011). When analyzing where the United States economy is in the business cycle, one can use data on GDP growth, unemployment, and inflation. GDP growth data shows the different growths and reductions that occur within the economy. It is also useful in determining which stage of the business cycle the economy is going through. The business cycle consists of four main parts that define the stages of the economy. These four stages include peak, recession, trough, and expansion. These stages are depicted in the image below to help give a better understanding of what each stage means:

As shown in the image, the peak is the highest point between the end of an economic expansion and the start of a recession. The next stage following the peak is the recession. During this time, there is a general slowdown in the economy and unemployment begins to grow. The third step in this cycle is the trough and this is where things stabilize. The economy is at the end of its downward spiral and it will soon begin to expand again. This upward swing, or the final stage, is known as expansion. This is where the economy grows and prospers. Jobs are created and the unemployment rates drops significantly. The economy begins to work back towards the first stage, peak.

The unemployment rate follows a very similar pattern as the economy. When there is a decline in unemployment, there is typically a rise in economic activity. During periods where there is a growth in unemployment, there is a slowdown in economic activity. Conversely, the inflation rate tends to follow a pattern that is opposite of unemployment. It is positively related to GDP growth. As GDP increases, economic activity increases. During this period, consumers become more self-assured. They spend more money on their...