Quiz 11: Unemployment Issues: Why Do We Waste Our Labor Resources
Economic growth is an increase in the size of an economy, which relates to the amount of activity taking place within that economy. One measurement of an economy's size is real GDP (gross domestic product), which is the GDP adjusted for changes in prices (inflation or deflation). Comparing GDP from year to year enables the rate of growth to be calculated, which is a measurement of the growth of the economy. Sometimes, the economy decreases in size, which is called a contraction. Because economic growth takes place over a long time period, while economic activity fluctuates rapidly over a short time period, one way to differentiate measurement of economic growth from the smaller fluctuations is to look at changes in GDP that occur over longer time periods. Whereas the individual rates of economic growth will tend to vary from one quarter to another, and even from one year to another, looking at the trend over many years, such as 5 or 10 years or longer, better characterizes the tendency of the economy to increase its size over time. For example, the following chart shows changes in the real GDP of the United States by quarter from 2007 through 2009. This three-year period sees an initial increase in GDP, followed by a decrease. In fact, the GDP at the end of the fourth quarter of 2009 iS₁.25% lower than the GDP in the first quarter of 2007. However, if the chart is expanded to look over 25 years rather than three years, a larger trend in economic growth becomes apparent, as shown in the following graph. Here, the highlighted region represents the time period examined in the earlier graph. As can be seen, the reduction of the GDP that happened from 2007 through 2009 was temporary and the GDP continued to increase after that time period. The GDP in 2014 was nearly 80% greater than the GDP in 1990. This example demonstrates how looking at indicators such as GDP over a long time period is an effective way of characterizing economic growth.
The business cycle is a conceptual pattern of increases and decreases in the size of an economy, which have been observed to repeat over time. The business cycle has four characteristics illustrated in the following graph of US real GDP by quarter. An expansion occurs when the economy grows. During an expansion, the growth rate is usually higher than the long-term economic growth rate. Expansion reaches a point where growth begins slowing, which is the peak. This represents the high point in the size of the economy prior to the next phase, which is contraction. During contraction, the growth rate becomes negative, and the size of the economy decreases. Eventually the rate of decrease shrinks, and a low point is reached, which is the trough. The trough comes before another expansion. Business cycles are difficult to predict because there are many different factors that influence whether the economy grows or shrinks, and although there have been many different theories that have tried to connect these to different conditions, such as inventory, money supply, or technology development, none of these provide a definitive answer that leads to a prediction of economic activity. Fluctuations make it difficult to tell whether an upward or downward movement will continue. For example, in the above chart, during the first quarter of 2008, the real GDP decreased, but this was followed by an increase in the second quarter. It would have been very difficult to predict that a contraction was about to occur, how long it would last, or the degree to which the economy would shrink in that time.
Business cycles include four characteristic features: Expansion, when the economy grows; the peak marking the end of expansion; contraction, when the economy shrinks; and the tough marking the end of contraction. The cycles of expansion and contraction repeat over time in irregular intervals. To understand the present state of the economy, consider a measure of the size of the economy, such as the real GDP. The following chart shows the real GDP per quarter from 2005 through the end of 2014. As illustrated by the recent increase in the real GDP in the past few years, the economy is currently (as of 2015) experiencing an expansion. That is, the real GDP is currently growing and has been for about the past four years. The most recent turning point was a trough that came about in 2009, which came at the end of a contraction that started in the last quarter of 2007.