Economics GDP and the Business Cycle Gross

Economics

GDP and the Business Cycle

Gross domestic product (GDP) is the economic measure which quantifies the production within a country's economy in a single period of time. The measure, which is usually on an annual or a quarterly basis, is usually calculated as the total market value of all the finished goods and services that country during the period (Nellis and Parker, 2000). In 2012 the GDP in the U.S. had reached $15,094 billion dollars, an increase on the 2011 figure of $14,582.4 billion (Trading Economics, 2013). This in turn was an increase on 2010, when the GDP was $14,043 billion. This would appear to indicate a growing economy, where there is an increase in output. However, this is the market value on current prices, each year the increase includes inflation, so the real growth, that is the actual growth less an allowance for inflation, is a better measure of how an economy is performing. Even without allowing for inflation it is possible to see that while there appears to have been a period of growth, 2010 was not a growth year, as the GDP figure reflected a fall, as 2009 had a higher GDP of $14,296.9 billion (Trading Economics, 2013). Historically the U.S. economy tends to grow at a mean of approximately 2-2.5% per annum, in real terms, but this is not evenly spread, some years have higher rates while other may have much lower or negative growth rates (Nellis and Parker, 2000).

This shows while there are growth years, there are also years were growth does not take place. This reflects what is known as the business cycle, a cycles where there are periods of growth or expansion and periods where the economy slows down or contracts. The GDP is the primary indicator of the stage in the business cycle that a country is experiencing.

There are four stages to the business cycle; these are an economic contraction, an economic trough, an economic expansion and an economic peak. The U.S. economy shows these different cycles, to appreciate what they are each of the business stages can be considered and then a graph may be used to show where they have occurred. The first stage mentioned was that if an economic contraction. During the economic contraction there is a slow down in the rate of growth, where the GDP for the period, will still show an increase, but the increase will be less than in pervious periods. The slow down of growth reflects a decreasing level of demand in the economy, which may start a negative cycle; decreasing demand reduces the overall need for firms to produce goods, and as they slow down, they may reduce their need for labor, which decreases the level of disable income in an economy and further reduces the demand for goods and services (Baye, 2006).

The contraction or slow down may lead to an economic trough, where the actual GDP reduces rather than increases. Traditionally a recession is defined as being when there are two or more consecutive quarters of negative growth (Nellis and Parker, 2000). A trough may not always result in a recession, as a recovery may start before a second quarter of negative growth. As a recession is assessed ion a quarterly basis it is also possible to have a recession in a year, where there is still an overall positive growth level for the entre year (Nellis and Parker, 2000).

As a recovery takes place there will be a slow rate of growth, taking the economy from the trough back in a positive direction. This stage is referred to as economic expansion or early recovery. The slow increase in real GDP will reflect increasing demand for goods and services in the economy, increased exports may also support increased GDP. The last stage is that of the peak, or late growth, where the growth accelerates to its highest point, before once again slowing down and declining. The graph in figure 1 shows the GDP for the U.S. since 2000, with the pink bars indicating where there were recessions.