Lesson 1 of 6 · 13 min
What a business cycle is: classical, growth and growth rate cycles
A business cycle is a recurring but irregular swing in broad economic activity, and whether you date its peaks and troughs by the level of output, its gap to trend, or its growth rate changes when the turning points appear.
In short
- Business cycles are recurrent expansions and contractions in economic activity that hit many sectors at about the same time.
- They are recurrent but not periodic: they keep happening, but with different lengths (from about one year to over a decade) and intensities.
- Classical cycle: swings in the level of activity (e.g. real GDP). Contractions are short, expansions long; outright falls in output are fairly rare.
- Growth cycle: swings of actual output around its trend (potential), i.e. the output gap. This is how most economists think about the cycle.
- Growth rate cycle: swings in the growth rate of activity. No trend estimate needed, and turning points show up earliest.
- Order of peaks: growth rate cycle first, then growth cycle, then classical cycle. Growth cycle troughs come later than classical troughs.
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