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Business Cycle - Short-term fluctuations and long-term trend

Explain, using a business cycle diagram, that economies typically tend to go through a
cyclical pattern characterized by the phases of the business cycle. See interactive diagram below

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                            Business cycle

The business cycle, also often known as the trade cycle, is the tendency of economies to move, in the short term, through periods of boom and slump. In other words, the business cycle represents the fluctuations in the rate of economic growth that take place in the economy. In the long term, economies tend to expeerience growth so the long term trend is upwards.

You need to be able to:

Explain the long-term growth trend in the business cycle diagram as the potential output of the economy.

Any economy has a given set of Factors of Production (Quantity and Quality) therefore there is a maximum GDP level that can be produced by those Factors of Production: This is often called the potential output of the economy and it shows the long term growth rate of the economy.

(The potential output can be described using a Production Possibility Curve or on and Aggregate Demand/Aggregate Supply diagram - you will come across this shortly))

You need to be able to:

between a decrease in GDP and a decrease in GDP growth.

In China the growth rate fell from 10% to 7% - does this mean that GDP fell during that time?


What the data says (1)

  1. Visit the World Bank Data site and examine GDP data for your own country over the last 20 years. Using this data, identify the years when the economy was in periods of boom, recession, slump and recovery.
  2. Explain why governments might want to predict where a country is in its business cycle?.


What the data says (2)

  1. Import the GDP data for your own country and three others from different continents into a spreadsheet and plot the data. Using this date, comment on whether it is possible to determine a longer term trend in economic activity. If it is possible, construct a trend line to show whether the economy is growing or declining over the longer term.
  2. Discuss whether the long term trends for all four countries are broadly the same or, whether there differences.