Introduction to Business Cycles II

A common way to observe business cycles is to examine real GDP, often referred to simply as GDP.

Under this approach, a recession is defined as two consecutive quarters of decline in real GDP.

This definition gained popularity because, historically, movements in GDP were closely linked to other key measures of economic performance, such as employment, inflation, and domestic investment.

For example, when GDP falls, employment usually declines, and business investment slows.

However, in certain situations, focusing solely on GDP can overlook important aspects of economic performance.

Consider two situations.

In one, GDP is rising, but unemployment remains high.

In another, GDP grows very slowly, but inflation rises rapidly, making everyday essentials more expensive.

In both cases, relying solely on GDP would suggest that the economy is performing reasonably well, while other indicators reveal clear signs of strain.

Overall, GDP is a useful measure of business cycles, but it does not show the full picture of the economy.