krugmanwellsmodulesecon3eupdate

Charting the Business Cycle

Figure 6-3 shows a stylized representation of the way the economy evolves over time. The vertical axis shows either employment or an indicator of how much the economy is producing, such as industrial production or real gross domestic product (real GDP), a measure of the economy’s overall output that we’ll learn about in the next chapter. As the data in Figure 6-2 suggest, these two measures tend to move together. Their common movement is the starting point for a major theme of macroeconomics: the economy’s alternation between short-run downturns and upturns.

Recessions, or contractions, are periods of economic downturn when output and employment are falling.

Expansions, or recoveries, are periods of economic upturn when output and employment are rising.

The business cycle is the short-run alternation between recessions and expansions.

The point at which the economy turns from expansion to recession is a business-cycle peak.

The point at which the economy turns from recession to expansion is a business-cycle trough.

A broad-based downturn, in which output and employment fall in many industries, is called a recession (sometimes referred to as a contraction). Recessions, as officially declared by the National Bureau of Economic Research, or NBER (discussed in the upcoming For Inquiring Minds), are indicated by the shaded areas in Figure 6-2. When the economy isn’t in a recession, when most economic numbers are following their normal upward trend, the economy is said to be in an expansion (sometimes referred to as a recovery).

The Business Cycle This is a stylized picture of the business cycle. The vertical axis measures either employment or total output in the economy. Periods when these two variables turn down are recessions; periods when they turn up are expansions. The point at which the economy turns down is a business-cycle peak; the point at which it turns up again is a business-cycle trough.

Business-Cycle Peak	Business-Cycle Trough
no prior data available June 185 7October 1860 April 1865 June 1869 October 1873	December 1854 December 1858 June 1861 December 1867 December 1870 March 1879
March 1882 March 1887 July 1890 January 1893 December 1895	May 1885 April 1888 May 1891 June 1894 June 1897
June 1899 September 1902 May 1907 January 1910 January 1913	December 1900 August 1904 June 1908 January 1912 December 1914
August 1918 January 1920 May 1923 October 1926 August 1929	March 1919 July 1921 July 1924 November 1927 March 1933
May 1937 February 1945 November 1948 July 1953 August 1957	June 1938 October 1945 October 1949 May 1954 April 1958
April 1960 December 1969 November 1973 January 1980 July 1981	February 1961 November 1970 March 1975 July 1980 November 1982
July 1990 March 2001 December 2007	March 1991 November 2001 June 2009
Source: National Bureau of Economic Research.

Table :

TABLE 6-2 The History of the Business Cycle

The alternation between recessions and expansions is known as the business cycle. The point in time at which the economy shifts from expansion to recession is known as a business-cycle peak; the point at which the economy shifts from recession to expansion is known as a business-cycle trough.

The business cycle is an enduring feature of the economy. Table 6-2 shows the official list of business-cycle peaks and troughs. As you can see, there have been recessions and expansions for at least the past 155 years. Whenever there is a prolonged expansion, as there was in the 1960s and again in the 1990s, books and articles come out proclaiming the end of the business cycle. Such proclamations have always proved wrong: the cycle always comes back. But why does it matter?