The business cycle

Published on March 30, 2021   19 min
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Hi, my name is Mariano Torras. I'm professor of economics at Adelphi University in New York. We're going to be doing a lecture series on macroeconomics.
One of the main concerns of economists is society standard of living. But beyond achieving an acceptable standard, we want to ensure that the economy be stable. We prefer that the macro-economy not be volatile, that is, we do not want it to swing back and forth between boom and bust. It is not sufficient that we experience an acceptable standard of living. We want stability in that living standard. A third goal, sustainability, we do not take up here.
Stability is why the business cycle matters to economists. The business cycle generally depicts fluctuations in the GDP growth rate over time. It is somewhat misleading to call their relationship a business cycle, since it describes something far more broad than business, the functioning of the entire macroeconomy. It is sometimes referred to as the economic cycle or even the trade cycle. But the term business cycle has stuck and remains in much more common use. When the economy is booming and GDP growth reaches a maximum, we say the economy is at a peak. When it is at a low point, the economy is at a trough. When it is moving from a peak to a trough, we say the economy's contracting, and when it moves from trough to peak, we say that it is expanding. The gray rectangle represents full employment, which is generally reached as the economy reaches its peak and faces inflation pressure. In recent memory, GDP has been, for the most part, rising over time, at least in the world's advanced countries. So much have we come to expect this, that we use a specific term, recession, to describe instances when it is not rising.