Economic Cycle

An economy goes through various stages

Stages of the Economic Cycle

Boom

Unemployment is low, consumers / businesses are spending. The economy is growing.

Downturn

Unemployment is rising. The economy is contracting

Recession

Unemployment is low. The economy has been contracting for atleast 2 quarters (6 months).

Recovery

Unemployment starts to decrease. The economy starts to grow.

Economic Cycle and Trend Growth

The trend growth diagram shows how SR growth goes up and down with the economic cycle, but the LR growth is different.

LR growth - Increase in 4 factors of production, e.g population

SR growth - Due to current position in economic cycle

Positive output gap

A positive output gap occur during booms. The economy is producing "above" the maximum capacity - it is unsustainable.

• Low unemployment
• High consumer spending
• High inflation

Negative output gap

A negative output gap occur during recessions. The economy is producing below the maximum capacity.

• High unemployment
• Low consumer spending
• Low inflation