Business cycles or economic flucuations are the upswings and downswings in aggregate economic activity. Business cycles are composed of two phases and two turning points.
1. Two Phases a. Expansion i. Time in which real GDP rises and unemployment declines. ii. Sometimes called recovery. b. Contraction i. Time in which real GDP declines and unemployment rises. ii. Recession - Six consecutive months of decrease. 1. A "severe recession" is called a depression. 2. No official definition of severe (length and depth).
2. Turning points a. Peak i. Real GDP reaches its maximum, stops rising, and begins to decline. ii. Determined after the fact. b. Trough i. Real GDP reaches its minimum, stops declining, and begins to rise. ii. Determined after the fact.
The sequence from one peak to the next, or from one trough to the next, is a business cycle. The pattern of contraction–trough–expansion–peak occurs over and over again but not at regular, predictable intervals.