Economics: Recessions, Depressions, and Booms

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In this lesson, we'll take a look at the business cycle. We'll define the terms that are used to describe the business cycle, and take a look at the historical record for the U.S. economy. First, the terms.
Imagine that the economy grows over time, along this trend line. The trend line represents the average rate of growth. Now, the economy will fluctuate around this trend line, and that's what's called the business cycle. The business cycle looks something like this: The economy growing more rapidly than its trend growth rate--this is the expansion of the economy. Eventually, it will reach a peak and start to grow more slowly, or actually contract. Now we're in a contraction, which lasts until we reach a trough. At this point, the economy will begin expanding again, expanding to a new peak, contraction, trough, expansion, peak, and so forth. Sometimes when these expansions are particularly marked, we call them booms, and when the contractions are particularly severe or prolonged, we refer to them as recessions. Contraction, recession, expansion, or boom.
Now, with these terms in mind, let's look at how the business cycle has played out in the U.S. economy since 1860. First of all, we'll put the change in gross domestic product from one period to the next on the vertical axis; and on the horizontal axis, the passage of time. Looking at this data, you can spot some of the important contractions in U.S. economic history. Here, we've got the panic of 1893, with the economy ultimately contracting. Here, we have the economy sliding into the Great Depression. And here, we have the stock market falling in the year 2000 and the economy slowing down in the aftermath. We can also spot some of the important expansions in the U.S. economy. For instance, the expansion during the 1990s, the expansion of the Vietnam War, World War II, World War I, and, more surprisingly, the expansion in our economy around the time of the Civil War.
Now that you know the vocabulary of the business cycles, you're ready to look at a diagram like this and ask questions. What went on in our economy at that point in history that might have been correlated with an expansion or a contraction? An important thing to notice too is that the expansions and contractions have gotten much less pronounced after the mid-1940s, after World War II, when the U.S. was practicing more active fiscal policy; that is, using government spending and tax cuts and monetary policy to try to keep the economy growing at a more steady rate. The expansions and contractions are markedly less pronounced than they were in the period before.
Economic Fluctuations: Unemployment and Inflation
The Business Cycle
Recessions, Depressions, and Booms Page [1 of 2]