What is the relationship between Gross Domestic Product (GDP) and the business cycle? How can you use information about the business cycle when making a decision about a large purchase?
Gross Domestic Product (GDP) refers to the market value of all final goods and services that are produced in a country in a given period of time. The term, business cycle, is used to describe periods of expansions of economic activity, followed by recessions, contractions and revivals. In an economy, if all the resources are fully utilized, then the economy is said to be producing at its potential GDP.
1. GDP
This measures all income and output through a series of national accounts. At the end of their fiscal year, all cash flow in and out is added up to determine the GDP. Real GDP is the adjustment for the distortion caused by inflation by measuring the fiscal output of goods and services in a given year against the prices of a base year while nominal GDP measures output using current year prices.
2.The business cycle
A country economy moves in a familiar pattern of four cycles
a) contraction: slow down in growth or recession.
b) trough: bottom end of the cycle
c) expansion: growth increases or recovery of the economy.
d) peak: top end of the cycle.
The normal business cycle experiences continuous fluctuations with one cycle leading no matter how prolonged to the next and the recession is defined as 2 consecutive quarters of declining growth in real GDP.
When the economy expands: unemployment decreases, inflation begins to increase and the real
GDP rises.
On the other hand, when the economy contracts: unemployment increases, inflation decreases
and the real GDP falls.
The movement of the actual GDP across the potential GDP is given by business cycle.
Graphically, the phases of the
