Business Cycle Phases

Boom, peak, recession, trough, the anatomy of fluctuations around trend growth.

Current equations

Actual GDP: Y = 30 + 0.8·t + 6·sin(2πt/8)Trend (potential GDP): Y = 30 + 0.8·t

The economy breathes. The dashed line is trend: what steady growth alone would deliver. The solid line is what actually happens: expansions that overshoot, peaks, recessions, troughs, recoveries. The vertical gap between them at any moment is the output gap.

Shift the curves

Cycle volatility (size of booms and busts)0

Bigger swings around trend: deeper recessions, hotter booms.

Trend growth rate0

The long-run engine: productivity and population set the slope everything cycles around.

The Business Cycle Phases model, in writing

Definition

The recurring, irregular fluctuation of output around trend: expansion, peak, contraction/recession, trough, recovery, with unemployment and inflation dancing counter to each other across phases.

Output gap = (Y − Y*) / Y* ; Okun's rule of thumb: 1pt extra unemployment ≈ 2% output loss

The intuition

Cycles are neither regular clockwork nor pure noise: expansions die of tightening or shocks rather than old age, recessions are shorter and sharper than booms, and investment swings far harder than consumption, the volatile component driving the ride.

Exam tip

Know which indicators lead (building approvals, confidence), lag (unemployment), and coincide (GDP itself).

Related models in Macro Foundations

AS-AD (Aggregate Supply – Aggregate Demand) →Keynesian Cross & the Multiplier →Phillips Curve →Money Multiplier →