I. The Business Cycle

Phases of the Business Cycle
Economies usually have long-term secular trends, such as a certain rate of expansion for the labor force and/or the general population. One feature of market economies is that economic activity sometimes rises above the long-term trend line, while at other times it falls below.

Figure 4.2


A business peak, or boom, occurs when unemployment is low, incomes are high and businesses are operating at full capacity. When aggregate economic conditions began to slow, the business cycle is said to be in a contraction, or recessionary phase. Sales begin to fall, and unemployment starts to rise. The low point of the contraction phase is called the recessionary trough. The business cycle begins the expansionary phase after the low point is reached and business conditions began to improve. Business sales improve, and the unemployment rate begins to decline. Another boom will follow, and the cycle will begin anew.

Conditions during the low point are referred to as a recession. Many economists define a recession as being a decline in Gross Domestic Product over two or more quarters. Severe recessions (both in length of time and severity of the contraction) are referred to as depressions.
Key Labor Market Indicators

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