Business Cycles.

This chapter uses line graphs (discussed in the "Graphic Discussion") and production possibilities curves (discussed in Chapter 1 "Graphic Detail").

Business cycle graphs show the ups and downs of economic activity in the economy. Economic activity can be measured in a variety of ways, perhaps most commonly by real GDP. Recall that real GDP is the dollar value of all final goods and services produced in the economy during a year, adjusted for inflation. Economic activity generally follows an up and down pattern, called a business cycle. During contractions (recessions), economic activity (real GDP) is falling. A depression is simply a very bad recession. During expansions, economic activity (real GDP) is rising. This is also sometimes called a boom.

When the level of economic activity is at its lowest point during a recession, it is called a trough. This is the lowest point before expansion begins. When the level of economic activity is at its highest point of an expansion, it is called a peak. The peak is the highest point before a recession starts. Thus a business cycle follows the patter of expansion, peak, recession, trough, expansion, etc.

While economic activity fluctuates in the short-run, it is important to note that the long-run growth trend of real GDP is upward. The economy may have its ups and downs along the way, but over time it is expanding.