The Business Cycle

 

 

[Click graph for larger version.]

 

 

 

Over time we have observed that capitalist economies undergo fluctuations in the overall level of business activity (usually measured as real GDP). The fluctuations are referred to as a "cycle" but the term is misleading because the cycle has no standard length. The four phases of the business cycle are:

The actual phases of a business cycle are not as regular as the model shows. Consider the graph of changes in real GDP between 1869 and 1991 below.

Graphs such as the one above, however, are misleading because they only show fluctuations about the trend. The overall trend is toward considerably greater wealth, as the graph below demonstrates.

The general trend is called the "secular trend line." The business cycle shows fluctuations about the trend line.